The survey of institutional investors carried out on behalf of NN Investment Partners found 30% see the market as becoming more attractive over next three to five years versus 39% who say it will be less so, while 39% expect to see an asset allocation shift to equities from bonds if interest rates rise versus 43% who do not.
The survey suggests fixed income allocations will hold steady, with it also finding only 21% of respondents expect their allocation to fixed income to increase and 25% expect it to decrease.
“Rising interest rates will of course be painful for bond investors,” said Sylvain de Ruijter, head of global fixed income at NN. “If 10-year bond yields, for example, start to rise, that would lead to negative returns for a lot of bond funds. But looking forward, higher yields would mean better yield income in the future. It would be even worse if, in five years, we are at the same levels as today, because of what that says about the economy and about the effectiveness of policy makers.”
“If rates rise significantly in the next five years, fixed income’s performance may not be spectacular, and equities may indeed outperform, but with greater risk,” Ruijter added. “And more importantly, nobody knows if such a rate increase is going to happen. If you invest broadly and actively in fixed income, you can earn a decent return.”
Ruijter noted that is clear that rising interest rates following unprecedented quantitative easing means bond markets are ‘entering new territory’ therefore asset managers will need to show greater flexibility and have the capacity to ‘assimilate a plethora of market data’ in order to make active management decisions.
