Current markets are all about understanding politics
The year 2010 was arguably an opportune time for a graduate in history and politics to become international chief investment officer for fixed income at a large investment house. As European governments teetered on the brink of a historic crisis, and entire economies were placed in the hands of politicians, the bond world focused less on mathematical models and more on unfamiliar areas such as political risk.
Nick Gartside, who two years ago started in precisely this role at JPMorgan Asset Management, graduated from Durham University before completing an MPhil degree in international relations at Cambridge University. Although fund managers’ marketing literature is obliged to inform investors that past performance is not a guide to the future, Mr Gartside says a key to understanding the present and the future of the markets is to understand their past.
“You’ve got to be aware of some of the psychological aspects that drive markets at times, such as fear and greed. They’re very important as they can cause things to undershoot and overshoot at times. That’s why the City is full of historians,” he says.
“Current markets are all about understanding politics and political reaction. Different things drive markets at different times. At times it’s the precise inflation print, or expectation for industrial production. At other times, and we’re in one of those now, it’s very much more political. Europe’s getting to a point now where the big market moves over recent weeks have been in response to elections in Greece and in France,” he adds.
As markets traditionally hate uncertainty, investors might be forgiven for thinking that the unknowns facing Europe would create a difficult environment for bonds. The manager argues, however, that these political and economic moves are creating an ideal backdrop for fixed income investing.
“There’s a very fine balance because if you have raging economic growth, ultimately that’s detrimental to bond prices because interest rates have to go up and it could be associated with more inflation. Equally, if you have a depression scenario it’s negative because, although interest rates fall, inflation falls and people aren’t earning enough money to pay you back,” he says.
“What we’ve got is a very sluggish growth trajectory, where the risk of interest rate rises are fairly minimal, the inflationary pressures are subdued but yet there’s enough going on [economically speaking] – so actually corporations are making money [and] governments are still collecting taxes. That’s a pretty good environment for a fixed income investor.”
To benefit from this, however, Mr Gartside says that “fairly aggressive” allocation across the different sectors will be required to dampen the volatility in the market. As a result, he and co-manager Bob Michele run their £472m JPMorgan Strategic Bond fund without reference to a set benchmark.
Although its investments are usually hedged back to sterling, the firm describes the fund as a “global go-anywhere” vehicle. Mr Gartside says that he and Mr Michele “scour the world looking for bonds that we think are going to go up irrespective of sector, irrespective of geography, so it’s a very flexible and modern fund”.