2012 in pictures and numbers
We review what happened in financial markets in 2012, from the unique perspective of our thinking and methodology.
It was a year that wrong-footed experts and the average retail investor alike. ‘Equity revulsion’ was evident in retail flows into bond funds exceeding net flow to equity funds by nearly 3:1 and in pension fund bond holdings exceeding equity holdings for the first time in over 50 years. Yet equities outperformed bonds in 2013 and beat their own long-term annual average real return. They did this with less than half their historic volatility.
Experts had talked of the ‘death of equities’ but should that really be bonds? Government bonds (the purest form of inflation bet) are the mispriced asset, not equities. Corporate bonds (the main beneficiary of allocations away from equities) add credit risk to the inflation bet. But credit risk is now just an overpriced (and overtaxed) form of equity risk. Conventional asset allocation, which mainly relies on bond holdings to match portfolio risk to client risk tolerance, has never looked so flawed.