The Great Rotation back to equities is taking root as investors reduce bond fund exposure in favour of equities. After the Federal Reserve chairman, Ben Bernanke, told Congress in late May the Fed might cut the pace of bond purchases if the economic outlook continued to improve, bond flows took a beating. In the four weeks from 29 May all bond funds tracked by EPFR Global saw outflows of roughly $58bn as markets feared the Fed’s ‘tapering’ would increase interest rates sooner than expected. Equity funds initially tracked bond markets down, losing $20bn between 22 May and 3 July as markets panicked in the aftermath of Bernanke’s statement. However, since then, equity funds have enjoyed significant gains, jumping $60bn by 14 August.
The S&P 500 rose 6% between 3 July and 2 August to 1709.67. The FTSE 100 gained 5.5% to 6647.87 over the same period. However, as investors piled money into equity funds, the major indexes began heading south again as concern mounted over the conflict in Syria. With the US gathering evidence to justify an attack on Assad’s regime, the outlook for equity markets for the rest of year looks less certain. The VIX, or ‘Fear Index’, which tracks volatility, increased from 11.98 on 2 August to 17.01 by 30 August, edging back towards the important 20 mark, widely regarded as the point at which markets are considered volatile. As the Great Rotation into equities takes root, the extent of Fed tapering and the potential for Western military action in Syria present significant hurdles to investors realising their expectations for equity returns in the short term.
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