I am putting the finishing touches on a presentation for tonight in Winnipeg and working in the chart above. It comes from Albert Edwards, the London-based global strategist at Société Générale.
“I am starting to think the move by institutions away from equities has gone too far” he writes.
Edwards argues that Pension funds and insurance companies are becoming over-invested in bonds at the expense of stocks. Since 1985, the long term mix between debt and equity has changed, according to Federal Reserve data. Bonds were 34% of assets as of Q3 2012 — that is up from 20% in 2006. Over the same period, Stocks fell to 39% from 61%. (source: David Wilson of Bloomberg)
Similar under exposure exists amongst UK pension managers (source: UBS Asset Management data). Equities accounted for 75% of UK pension-fund assets in 1999 (UBS data). Insurers have less than 10% of assets in stocks.
This is, to my way of thinking, a long term bullish factor. Edwards is in agreement with the long term view, but he has shorter term concerns that “stocks are in a bear market — “The Ice Age” — that may bring the lowest prices in a generation.”
The bullish counter-argument is that occurred back in March 2009. The counter-counter-argument is that gains are mostly Fed-driven, and history shows those tend to be ephemeral. The counter-counter-counter-argument is that as time elapse, the economy heals, individuals deleverage, and we get that much closer to the end of the secular bear that began in March 2000.
One last note: “Edwards wrote that the situation is the opposite of what occurred in the late 1990s, when institutions’ focus on stocks made them vulnerable to the market drop that followed.”
Pensions Have Too Much in Bonds to Suit SocGen: Chart of the Day
Bloomberg January 17, 2013