With the US Federal Reserve saying that interest rates will stay near-zero to “at least mid-2015” and other governments suggesting a similarly accommodative stance in light of global market uncertainty, BoS expects investors will deploy their cash into higher-yielding assets like corporate bonds and equities.

“Add inflation into the equation, and you will see that holding cash and government bonds appears even more unattractive,” the report, entitled 2013 Macroeconomic Outlook and Asset Allocation Strategy, said.

The bank’s investment strategy for 2013 is “underweight cash, overweight high yield bonds, and neutral investment grade and equities allocation”.  

However, the bank said that it expects the equities market to bottom out in 2013, supporting the potential switch from fixed income to equities, also know as the “Great Rotation”. Specifically, using S &P 500 and 10 year US treasury bonds as examples, it said that the yield gap between equities and bonds is currently at 5.3 per cent, having only ever reached 6 per cent three times since 1970, suggesting that a rotation to equities is due.

“With more policy visibility and further evidence of a sustainable growth recovery outlook, we will look to increase our allocation to equities, while reducing cash and some short-duration investment grade bonds in 2013,” it said.

However, due to economic uncertainty, BoS recommended that investors hedge their portfolios against tail-end risks such as a possible US “fiscal cliff” and debt ceiling, a replay of the European sovereign debt crisis and a China hard landing.