Great Rotation is great myth

By Vikram Barhat | March 21, 2013 | Last updated on March 21, 2013
3 min read

The Great Rotation—the flow of funds from bonds to equities—is no more than a catchy phrase.

It’s favoured by those looking to push people into the stock market, says Patrick O’Toole, vice-president of global fixed income at CIBC Asset Management. He co-manages the Renaissance Canadian Bond Fund, the Renaissance Real Return Bond Fund and the Renaissance Optimal Income Portfolio.

He adds negative bond sentiment has occurred at the beginning of each of the last few years, with analysts consistently warning investors to sell bonds and buy stocks.

Read: Is a shift from bonds to equities coming?

O’Toole concedes interest rates are low and investors have to be cautious about bond investments. However, he also finds many people aren’t moving completely to stocks, meaning there’s ample opportunities to help clients get into fixed income.


He reminds advisors there’s a big difference “between the mindset of investors [now] versus where they were prior to the credit crisis. Before, many aimed for growth while they now want cash flow.”

He adds, “There was about $38 billion of net new cash flow into stock mutual funds in the U.S. But if you look at the bond side, it still has net cash inflows of $33 billion.”

So investors are simply pulling money away from money market funds and moving into riskier assets, which includes both stocks and bonds.

Read: From asset to risk allocation

Further, O’Toole predicts interest rates will stand pat and inflation will remain at current levels. “The BoC isn’t going to change rates this year, which is a good anchor for longer-term bond yield.”

He also forecasts Canadian bond yields will increase over the next twelve months since the country is healing slowly.

This is in part because there won’t be significant job gains in the Canadian government and construction sectors like in the past few years, which helped boost markets.

Read: Canada’s economic growth curbed: RBC

What’s more, O’Toole says the housing market faces an uphill climb in 2013 due to tougher mortgage rules and the crackdown on low mortgage rates offers.

“New housing starts aren’t going to be as strong as last year,” says O’Toole. “House prices will level off a little bit and may even decline in some major, more heated markets. That should have a moderating influence on consumer spending.”

South of the border, the U.S. economy looks a little healthier. But American interest rates may rise in 2013, which would mean negative returns for the bond market.

Read: Central bank intervention the new norm

“[However], a significant rise that would see a negative return for the bond market isn’t part of our forecast,” notes O’Toole. “We’ll keep watching job growth and income growth, [as well as] gas prices.”


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Vikram Barhat