ZURICH (Reuters) - Investors should think again if they still believe government bonds are always a safer bet than equities, Mark Andersen, Head of Investment Strategy at UBS Wealth Management Research, told Reuters.
Shares, traditionally viewed as riskier investments than govvies, should give investors the best returns in the coming year as valuations are still low after taking a battering in the financial crisis, Andersen said in an interview.
"The return outlook for government bonds is close to awful," Andersen said, adding real returns -- after accounting for inflation -- were in some cases zero or even negative. "This is neither profitable for the client nor for us."
High debt levels in places like the United States and some European countries made government bonds far less secure than previously assumed, and that at a time when interest rates were at record lows, making returns unattractive.
"Private clients have yet to change their thinking of government bonds as a safe bet. It's new rules in fixed income -- it's not necessarily a safer buy than equity."
Furthermore, equities offered a much better hedge against inflation, Andersen said, as the profits generated by companies rise with inflation, increasing valuations.
"Gold is of course the ultimate hedge against inflation. We think gold will continue to rise because of continuing uncertainty, but it's difficult to say where it will end," he said.
While private bank clients had started to pull money out of cash and invest in corporate bonds, particularly in emerging markets, they had yet to recognize the potential of equities, missing out on possible gains buried in currently low prices.
These clients remained cautious about investing in shares after many lost large amounts of their wealth on the stock market during the financial crisis, Andersen said.
However, investors should look for opportunities in core European markets recovering strongly from the recession, such as Germany or emerging market economies, particularly the BRICs or Asian growth stories like Indonesia.
And sectors with high exposure to emerging market growth like metals and mining also offered good prospects for returns, though investors should tread with caution in other areas.
"Financials are still the big uncertainty because of all the worries over sovereign debt," Andersen said.
(Editing by David Cowell)