Merrill Lynch RIC Report: 2013 as Great Rotation from Bonds to Stocks


Bank of America/Merrill Lynch has its monthly RIC Report out, and the aim is a map ahead, now that shares have surged and the interest in risk assets has surged so much. The theme of this report is about 2013 finally being the year of the great rotation from bonds into stocks.

The report said:

Following the recent market rally, one of the biggest questions we get from clients is, should we buy equities today, or wait for a pullback? The recent series of strong economic and corporate earnings data confirm that the underlying macro fundamentals are improving, and there's no doubt that secular positioning argues that investors should favor equities over bonds. But from a short-term perspective, we believe that sentiment has come a bit too far, a bit too fast. Equity inflows have picked up quite dramatically over the past 11 weeks, and risk appetite has surged. This may make stocks a little vulnerable to a healthy, late-winter pullback. We recommend that investors use any weakness as a buying opportunity and stay steadfast in our conviction that equities will be 2013′s best performing asset class.

The bank also sees investors finally making the great rotation from bonds into stocks, even if it is a call that they have looked for for two years. The report says:

We now believe 2013 will be the year that the Great Rotation begins in earnest, although this will be a multi-year and sometimes bumpy transition. Risks to the theme include a sharp rise in interest rates, or a "tail-risk" event that sparks risk aversion.

The bank continues to prefer leveraged closed-end bond funds, MLP assets and bonds that act like stocks (high-yield and emerging market debt). Here is the chart that BofA uses to highlight long-term bond yields bottoming out:


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