M&G shorts government bonds

M&G managers are shorting government bonds and paving the way for an influx of equity income, according to global head of sales Jonathan Willcocks.

"Government bonds are now the riskiest assets and equities are now the lowest risk, because they are cheap compared to their future earnings potential. Government bond spreads have collapsed and we are short on all government bonds," he said.

"Cash is the worst asset class. There is the perception that cash is cool, but it’s not, it’s one of the worst assets to own."

Willcocks says markets have been saved – for now – from the European debt crisis by the LTRO programme, but that the economy remains weak because there is no velocity of money.

"Quantitative easing has not filtered into the economy, there’s been no bounce in economic growth. That will happen and then inflation will become a problem again," he said.

Rob Love, head of research at Asset Intelligence, says gilts are taking on a different role to the one they previously had. Managers are putting more into government securities, which they wouldn’t have three or more years ago.

"They’re not necessarily riskier than specialist global equities. You need to ask if the global financial community will allow a sovereign default which could bring about chaos in that sector. How likely is a financial meltdown? To say they’re risky means you think that that’s a problem. We consider that there has been a dynamic change in the perception of gilts since the start of the crisis, first with people fleeing to gilts, then reassessing that view to come out of them," he explained.

Willcocks added that the demographics of investor behaviour are changing, meaning there is a high demand for steady earnings.

"The baby-boomer generation has created a wealth bucket and that generation is now looking for income," he said.

He warns that decumulation, or the conversion of the pension assets people earn in their lifetime into income, will make inflation a huge concern going forward. He says retirees are likely to run out of money.

"Inflation will be a problem for 20 years. That’s a problem for those retiring and decumulating now, as they will be struggling. If you retire now you need to reserve capital. There will be a huge decumulator effect, which will mean equity income will be the asset class of choice – it used to be a half-way house, not now."

He says dividends should grow, which will help protect against inflation, but that investors need to look away from the UK and start to consider global equity for income.

He also believes the recent surge into fixed income has been caused by nervous market sentiment, but that that will turn around.

"Investors have been whiplashed by volatility and are now more afraid of losses than ever before, which means income streams have been lost, which is causing a surge in fixed income. There will be a migration from fixed income into equity income, though," he said.

"A year ago no-one wanted bonds, everybody wanted equities. At the start of this year the perception was that equities were not the asset class to be in. Risk has now been put back on the table."