NEW YORK Move over, bonds.
Top money managers' favorite investment trade in the new year are U.S., emerging market and international stocks.
With bond yields still near historic lows and inflationary pressures expected to rise, investment managers from New York to London participating in the Reuters 2011 Investment Outlook Summit are increasing their exposure to equities of all kinds.
The potent combination of unconventional monetary easing by major central banks, including the Federal Reserve, European Central Bank and the Bank of Japan, along with a tax-cut deal in the United States, has boosted the attractiveness of global stock markets.
Even bond managers at the summit acknowledged that their happy days are over. "Returns in bonds were delightful, were double digits," in 2010, said Tad Rivelle, chief investment officer of U.S. fixed income for TCW. But those double-digit returns are "arithmetically unsustainable," Rivelle added.
As one example, high-yield, or junk, bonds are up nearly 14 percent so far this year while the equity MSCI All-Country World index .MIWD00000PUS is up only 7.95 percent.
Small wonder, then, Reuters' surveys of 55 leading fund management houses in the United States, Japan, Britain and Europe showed a continuing desire to invest in stocks heading toward year-end.
'CHEAPEST MAJOR ASSET CLASS'
For their part, U.S. equities have found many fans because of their undervaluation relative to fixed-income securities.
According to Thomson Reuters data, the U.S. benchmark index S&P 500's price-to-earnings ratio, a gauge for stock value, converts into a so-called earnings yield of 7.9 percent.
That is well above comparable yields of 3.22 percent on 10-year U.S. Treasuries and 4.7 percent on BBB-rated corporate debt in the Bank of America Merrill Lynch Fixed Income Indexes.
Veteran money manager Martin Sass called U.S. equities "the cheapest major asset class out there," and said growth in equities growth was being fueled by piles of corporate cash -- money they will ultimately start spending on plants, equipment or mergers and acquisitions.
"For the last several years people have hated equities ... now, the conversation is turning around," he said.
Bob Doll, chief equity strategist at BlackRock Inc (BLK.N), which oversees more than $3.3 trillion in assets, echoed those sentiments and said the U.S. economy is strengthening.
Even before the tax-cut compromise, investment bank Goldman Sachs Group (GS.N) raised its 2011 U.S. gross domestic product forecast to 2.7 percent from 2 percent. On Tuesday, Goldman said a deal President Obama proposed to extend low tax rates could add 0.5 to 1.0 percentage points of growth on top of that.
EMERGING MARKET EQUITIES HOT
Emerging markets also remain at the front of investors' top investment trades of 2011. More and more, these commodities- and consumer goods-driven markets, formerly viewed as high risk underdogs, are becoming the drivers of many global sectors -- and all the rage in the investment world.
"Higher growth and lower debt -- isn't this a good thing in this world? And that is what the emerging markets have over the developed markets," Doll said.
But looking to dip deeper into emerging markets, many investors aren't necessarily ready to cash out for exotic company shares. Instead, they are reaching out through familiar Western and U.S. firms exposed to emerging market growth.
Many money managers at the summit repeatedly named international technology, energy and consumer goods firms as their top 2011 picks -- companies such as Microsoft Corp (MSFT.O), Google Inc (GOOG.O), Apple Inc (AAPL.O), Unilever (ULVR.L)(UNc.AS) and ConocoPhillips (COP.N).
(For summit blog: blogs.reuters.com/summits/)