November 13, 2017 / 11:57 PM / 2 years ago

Bernstein faults 'unwise' bond bets, sees longer stock bull market

NEW YORK (Reuters) - Richard Bernstein, a longtime market strategist who a year ago correctly predicted a strong 2017 for U.S. stocks and corporate profits, on Monday said bonds are less safe and the 8-year-old bull market in stocks will persist longer than many believe.

Speaking at the Reuters Global Investment 2018 Outlook Summit in New York, the chief executive of Richard Bernstein Advisors LLC and former chief investment strategist at Merrill Lynch & Co said the 2008 global financial crisis remains fresh in many investors’ minds.

He said that is causing many to flee to the perceived safety of a low-yielding bond market in a way that “if not irrational, is certainly unwise,” given the potential to lose principal and forgo asset classes capable of higher risk-adjusted returns.

“The 2008 experience has caused people to be so risk-averse that they’re actually taking a lot more risk than they think,” Bernstein said. “There is nothing safe about income investing if it’s done to an extreme. Like your mother used to say, everything in moderation.”

U.S-based bond mutual funds and exchange-traded funds have taken in $2 this year for every $1 pulled in by stock funds, according to Thomson Reuters’ Lipper unit.

Bernstein said stocks are a better alternative.

“I really think the bull market is going to last longer than people think,” he said. “It will end with fundamentals deteriorating, too much liquidity being taken out by central banks, euphoria, and nobody believing that the issues that are suggesting caution are worth looking at. [I] don’t think we’re even close to that stage.”

Bernstein said too many investors still believe that “risk is perceived to be what you’re not in,” recalling how in 2000, when he was at Merrill at the peak of the technology bubble, many investors thought dull dividend-paying stocks were “toxic.”

He said investors fail to appreciate how there is a “range between capital appreciation and income” to plow, and that more Federal Reserve interest rate hikes are unlikely to drive rates too high, and perhaps herald an economic downturn.

“I have no clue how many times they’re going to tighten,” he said. “But unless inflation really starts accelerating, I think they’re going to be more gradual than people think. They’re going to tolerate more inflation rather than less.”

Bernstein, who a year ago said a global corporate profit recovery was “in the very early stages,” said he had a rough first quarter in 2017, having failed to appreciate investors’ “overenthusiasm” after the 2016 U.S. presidential election and how it would affect cyclical stocks.

But he said that with corporate profitability now on the upswing, stocks in cyclical, financial and technology sectors look like good bets.

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“Whether you’re renting them now or owning them, that’s a more difficult question,” he said. “I think it’s too early to hunker down.”

Follow Reuters Summits on Twitter @Reuters_Summits

For other news from Reuters Global Investment 2018 Outlook Summit, see: here

Reporting by Jonathan Stempel and Jennifer Ablan in New York, Editing by Rosalba O'Brien

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