Equities love affair coming to an end, says PIMCO

Australians have not yet given up on equities, but this may change due to the current market correction, according to the head of PIMCO Australia, John Wilson.

Wilson said people have not yet given up on equities because they performed so well in the post-global financial crisis market rebound. But he said people might look more favourably on bonds due to the current market correction.

Referring to recent Watson Wyatt research, head of PIMCO Global Wealth Management Australia Peter Dorrian said Australian investors in a typical balanced fund have the lowest range of fixed income of any developed superannuation market in the world.

"Ten years ago it was about 25 per cent; today it's about 12 per cent," he said.

He said Australian investors moving into retirement were particularly likely to be overweight in equities as they rely on income, adding that it was unfortunate this was the case when the global financial crisis hit.

While the favouring of equities continued over the last decade, Dorrian pointed out that stocks across various indices in the Australian market have not outperformed bonds to the extent that many might have anticipated.

"Over the decade the stock market index performed just over 1.3 per cent per annum more than the Aussie bond index," he said.

He noted that in the new economic world, returns from equities are not expected to enjoy the same levels of returns as in the past.

"We have been preaching the concept of the 'New Normal' over the last 12 months or so, [which is] characterised by low levels of economic growth and lower levels of expected returns from equities versus bonds [due to lower economic growth]," he said.

Dorrian said reregulation would also depress equities returns over time.

Wilson said PIMCO expected a slower recovery in developed markets and a robust emerging market recovery. He said while developed markets grappled with high unemployment, private sector deleveraging, de-globalisation and reregulation, emerging markets were experiencing high savings rates, no debt bubbles and further capacity for government spending.

PIMCO hopes to enhance returns to investors by targeting emerging markets, particularly Latin America, and Australian debt.

"We're investing in emerging market debt and focusing on countries such as Brazil, Mexico and Russia. Retaining holdings of Australian inflation-linked debt and well capitalised financial institutions such as the big four Australian banks will also drive returns," Wilson said.