Interview
The Equity Duration Puzzle
- Investors are expected to shift toward equities over the coming year as bond yields remain at or near the zero lower bound, offering limited return potential and removing their traditional role as a buffer against equity risk.
- Despite the high equity risk premium and a yield gap between the S&P 500 and the US 10-year Treasury at post-financial crisis levels, equities are deemed expensive in absolute terms, particularly long-duration growth stocks vulnerable to rate volatility, regulatory changes, and taxation risks.
- The outlook anticipates economic recovery from the COVID-19 shock continues in the near future with limited inflationary pressures and rate volatility, creating a runway for at least one year of overweight equity positioning.
- While long-term wealth de-rating is unlikely to hinder future equity performance, historical data indicates the equity risk premium has largely disappeared since the 1990s in markets such as Japan and Europe, suggesting caution despite current yield advantages.
- To mitigate concentration risks in US growth stocks, the strategy favors international and style diversification by reducing US equity exposure, increasing international allocations with lower duration, and mixing cyclical and value sectors with growth sectors.