In a survey of 255 institutional investors from across Europe, including the UK, 50% felt the return potential for government bonds in the region as a whole over the next five years was negative.
This bearish outlook was even worse for the government debt of countries that have received significant safe haven inflows over the past few years.
The country seen to be the least likely to generate a positive return was Switzerland, which 70% of those surveyed deemed to have negative potential in the next five years.
In comparison, less than 20% thought Italian government bonds had negative returns potential, while over 60% had a positive view on the return potential of this asset class.
The return potential of gilts over the same period was viewed as positive by 18%, negative by just over 30% and static by just over 30%.
Equities and real assets
Meanwhile, results of the Aquila Capital-commissioned report showed 62% of institutional investors believed the return potential of equities over the next five years is positive, 10% viewed it as negative, 19% as static and 9% didn’t know.
Opinions on the outlook for real assets were also cautiously bullish, with 41% pitting them as positive, only 12% as negative and 37% stating they would remain the same.
But despite the gloomy outlook for government bonds, institutional investors are not preparing to decrease their allocation to them over the short term.
Asked if they were preparing to change allocation to government bonds in the next 12 months, 60% said they would keep it the same, fewer than 20% said they would increase it and only 20% said they would decrease it.
Nonsensical allocation
This indicates a continued risk-off appetite in 2013, reinforced by the fact at least 40% would currently invest in British, French, Dutch, German, Swedish and Norwegian government bonds even though they think their return potential over the longer term is negative.
Roland Schulz, managing director at Aquila Capita,l said: “Institutional investors are operating in an increasingly complex environment where investment risk profiles are continuously changing and we are seeing this reflected in their investment decisions. We are still seeing a high share of bonds, both corporate and government, in portfolios which underscores the low risk profile of investors.
"However with the changing risk profile of bond investments, investors are increasingly moving towards alternative investments in particular real assets, equities and absolute return.”
