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Traders prefer bonds as fears of a pullback rise steadily

WITH the FTSE 100 back down below the 5,000 mark, the bears are beginning to feel a little smug. Since July they have been warning that the rally in the markets has been overdone and that we are due a correction. Professor Nouriel Roubini, the economist known as Dr Doom, has said recently that &ldquo;markets have gone up too much, too soon, too fast&rdquo;. And now it seems that investors are finally starting to pay heed to the pessimists.<br /><br />Thomson Reuters&rsquo; September global asset allocation survey shows that investors have cut back on buying equities for the first time since May. The survey of investors in the US, UK and Europe showed that just 54.9 per cent of investors&rsquo; portfolios is in equities, the lowest level since February and below the long-term average of 59.3 per cent.<br /><br />It would appear that investors are switching their money into bonds, since the data also indicated that the percentage of portfolios allocated to bonds rose to 35.8 per cent from 34.5 per cent in August. This is likely to have been caused by more fearful investors choosing to put thier money into safe havens such as gilts.<br /><br />But is this such a good idea? Credit Suisse analysts have been urging investors to hold on to their equities. Andrew Garthwaite and his equity research team at Credit Suisse argue that while tactical indicators &ndash; including equity sector risk appetite and net corporate issuance &ndash; at current levels would normally lead them to downgrade equities, their signals are less meaningful at this stage in the cycle. &ldquo;A further near-term correction is possible, but we believe that the S&amp;P 500 will be 1,100 by year-end,&rdquo; they say.<br /><br />It would take risk appetite rising to two standard deviations above average (it currently stands at 1.6), net issuance rising above 1 per cent of market capitalisation (0.5 per cent now) and economic and earnings momentum peaking for them to change their stance on equities.<br /><br />Meanwhile, Morgan Stanley&rsquo;s Teun Draaisma believes that now is the time for investors to get back into European equities and that it is time to start preferring equities over high-quality credit.<br /><br />In the short term, the FTSE 100 is struggling to post gains and consolidate above the 5,000 mark. But we can reasonably expect the markets to pick up in the next few months. Given these two facts, savvy investors should be locking in their profits in equities now, with one eye on a future revival in stocks.