EUROPE – The great rotation from bonds into equities is a myth, according to Nick Gartside, international CIO for fixed income at JP Morgan Asset Management.

He told IPE that while money was flowing into equities it was from cash reserves rather than fixed income.

"However," he added, "a great rotation is taking place within the fixed income space, as money is flowing into unconstrained strategies without a benchmark.

"In fact, we even see a bit of a rotation into fixed income, particularly from institutional investors whose liabilities have increased due to the current low-yield environment."

High yield and emerging market bonds, investment-grade bonds and total return strategies are particularly popular, according to Gartside.

He says that emerging market mandates are still global rather than region- or country-specific, although the universe of emerging market debt has increased.

"There are now three ways to access that opportunities set – US dollar-denominated bonds, corporate bonds and local currency bonds, and we see growth in all three strategies," he said.

"We also see value in European corporate bonds, and spreads will only get tighter and tighter.

"In addition, security selection is likely to increase in importance, and the dispersion between the best and worst performers is likely to widen."

Gartside also feels more comfortable with government bonds in the southern periphery of Europe again.

He thinks the summer of 2012 was the defining moment in the euro-zone crisis, as the European Central Bank (ECB) changed its behaviour from reactive to pro-active.

That change helped to reduce systemic risk.

But Gartside says there has been no evidence yet that rates will go up any time soon, as levels of economic growth remain near zero for the fifth consecutive year.

He expects the rates to remain low for another 2-3 years.

"The only thing that could increase interest rates to rise is adequate wage inflation, which could kick-start a lot of the economy," he said.

Gartside expects the period of risk on-risk off to continue, with the phases of risk-off being shallower.

A few weeks ago, Evercore Pan-Asset Conference attendees heard institutional investors remained nervous about moving into equities.

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