by

Rajesh Goyal

What is Great Rotation ?

The term 'Great Rotation' came into spotlight in USA when towards the end of 2012, Bank of America Merrill Lynch investment strategist Michael Hartnett predicted that investors who had fled the stock market for the safety of bonds (after the 2008 financial crisis)  would start to rotate back  into stocks.

It is reported that till middle of February, 2013, in USA investors have added more money to bonds than stocks - US stock mutual funds have raked in nearly $20 billion as more compared to bonds funds which have attracted $40 billion.   However,  what is really to be noted is the fact that investors have been adding to stocks at the expense of their cash holdings. 

In the aftermath of 2008 crisis, investors initially flocked to cash and assets in money market funds jumped by nearly 40% to about $ 3.5 trillion and peaked at $4trillion in 2009.  Thereafter, these started declining until the end of 2012 when fiscal cliff fears sent investors back to cash.    However, now once a deal to avoid the cliff was struck, assets in money market funds and bank deposits again have started falling and that money has been flowing into stocks.

There are other section of strategists who have serious about this Great Rotation.   They feel it is a temporary and may not last for long,    They are of the view that while we may well see fund flows move in the direction of the equity market, it is hard to believe we will see a massive asset reallocation.    Still, we find Pension funds are inexorably towards bond-heavy portfolios as their membership matures and they reduce risk and aim for income; the same approach will be followed by ageing savers all around the developed world.   Thus, instead of  Great Rotation, there may be only a mini-rotation.

Thus, we can say Great Rotation is being used to denote the likely shifting of funds from Bond market into equity market at a large scale, which may or may not actually happen.