“Older people don’t tend to riot.” JPMorgan Asset Management’s Nick Gartside is discussing the possibility of continental Europeans rising en masse in bloody protest against unemployment and austerity measures handed down by a central bank that usurps national sovereignty.
A mere 10 years ago, this discussion would have been unthinkable.
Bond fund managers such as Mr Gartside, who is international chief investment officer for JPMAM’s global fixed income and currency group, are accustomed to analysing risk and the likelihood of outcomes.
Globalised financial markets mean managers’ decisions hinge on how they perceive socio-geopolitical trends and risks, and how markets will respond, not least when global markets are in crisis mode.
In this environment, with its heightened “interplay between economics and politics” affecting almost every market, Mr Gartside is fortunate to be able to draw on his Masters in international relations, gained at Cambridge University in 1997. We meet on a clammy July day in an understated office by London Wall.
The European Central Bank and the Bank of England have just told markets they intend to maintain near-zero interest rates for the foreseeable future. The conversation leads, inevitably, to what will become of the eurozone.
The outlook, says Mr Gartside, depends on a combination of issues. “We broadly think of the eurozone as a triangle of very complex problems: very weak public finances, bank fragility and sovereign stress. The ECB has given if not a backstop then certainly clarity to two sides of that triangle.
It has made it clear liquidity will be provided to banks and that in terms of sovereign stress there is a limit. That leaves weak public finances. Reforming public finances is a process that takes at least a decade. It is also probably a code word for austerity and cuts. That is where we are with the eurozone now.”
Large anti-austerity protests have flared up in Greece, Italy, Spain, Portugal, France, Ireland and the UK, and upheavals in Tunisia and Egypt started as anti-unemployment and anti-austerity protests before evolving into wider revolutions.
Mr Gartside says public finance reforms will create “real flashpoints” from “a horrible process whereby people get poorer, where you are going to get political instability as politicians implement very unpopular policies”.
Yet he says the civil unrest across Europe “has not been particularly high” and is unlikely to tip over into market instability – because of Europe’s demographics. Ageing populations combined with falling birth rates is an “overarching theme for developing economies and some emerging economies”, Mr Gartside says, in response to whether Pimco’s “new normal” post-2007 landscape of low growth, high unemployment, low investment returns and heavy government economic intervention is an accurate picture.
“Perhaps we have an environment where growth rates are structurally lower than, say, in the post-war period. That affects a number of eurozone countries acutely: Germany and Italy spring to mind. It is no accident that one of the lowest growth rates is in Japan, which has a population that is falling,” Mr Gartside explains.
“In a very simplistic sense, if you have ageing populations, older people don’t tend to riot. If you look around the world, you can almost predict where riots or civil disorder will be: places with much younger populations.”
For Mr Gartside, the ECB had succeeded where the US Federal Reserve had failed – it has provided a clear exit strategy for its quantitative easing strategy and clarity about its future interest rate policy. Days earlier, following the Fed’s announcement that it could taper off QE as early as this year, 10-year bond yields soared (gaining 100 basis points within two months). The markets had concluded – incorrectly – that QE tapering was a byword for interest rate rises, building on fears that rates would bite at the first signs of economic stabilisation.
“Markets overreacted,” Mr Gartside says. “They were too aggressive in pricing interest rate rises. Markets always overreact, because they can price the future either too soon or too late.”
He concludes that QE strategies have run out of steam – “QE’s impact has become questionable” – and that rather than lowering the cost of finance so that corporates can use leverage to stimulate economic activity, “QE has been very good at inflating financial asset prices”.
In a world that is, as Mr Gartside describes it, “awash with debt” and shocked into deleveraging by a global credit crunch, cheap money supply seems a bizarre panacea. The US, the world’s biggest bond market, did not need to calm financial markets following the QE tapering statement, he suggests, but to convince US consumers that interest rates would remain low, enticing them to continue spending.
But, Mr Gartside points out, there is a crucial missing ingredient: wage growth. This, he says, will be a key indicator and a measure of the success of QE strategies. He explains: “If the consumer gets a pay increase, they feel better about themselves, about their employer. They will spend the marginal pound, dollar or euro, and that is very good for the economy – you get a multiplier effect, which is also very good because that is how you build inflation expectations.”
The problem, he says, is wage growth has been lacklustre. Corporate health is strong, and many have paid down debts and recapitalised but are unwilling to invest in staff while the economic outlook is stable but stagnant: the age-old economic chicken-and-egg conundrum.
So, will history look kindly on the Fed’s decisions during this challenging period or on Ben Bernanke, its chairman, more specifically?
“You could make a case that the BoE has more credibility than the Fed. In the UK inflation is 50-60 per cent higher than in the US, yet you have bond deals that are lower than in the US. So just conceptually, there is something wrong there, and maybe one argument is that BoE policy is seen as more credible than Fed policy.”
What informs that credibility? “It goes back to the clarity of the communication strategy and always having an exit plan,” Mr Gartside says. “When the history books are written, the Fed’s QE Infinity policy could be seen as a mistake. Markets might not like it that QE is about to end, but at least they can price it in. That is what the other central banks have done.”
The JPMAM way is to consider how assets compete with each other, and for bond managers such as Mr Gartside, how different fixed income instruments compete with each other. He says a “great rotation” from benchmarked strategies towards unconstrained strategic bond-style strategies is afoot, and while retail investors’ appetite for fixed income has waned, institutions are “rotating” from equities into fixed income to meet their liabilities to an ageing population.
“There is a disconnect between how those two [investor] groups operate,” he says. Drawing on the factors he considers drive markets – fundamentals, technical factors and valuation – Mr Gartside favours high yield (roughly 7 per cent, default rates at 2-3 per cent and the next redemption cycle in 2018), “select” investment-grade bonds and a short bias to government bond.
He describes all bond fund managers as “natural sceptics”. “If you are lending money, you want it back and the interest paid. Equity investors are buying a share of future profits, so they are bound to be more optimistic.”
In this environment, with markets perhaps responding in more of a knee-jerk fashion than before the crisis, it is good to be a sceptic.
Anna Lawlor is a freelance journalist
CV
Nick Gartside
2010-present
International chief investment officer, JPMorgan Asset Management
2002-10
Euro government bond manager, global government bond portfolio manager and head of global fixed income, Schroder Investment Management
1997-2002
Portfolio manager, Mercury Asset Management/Merrill Lynch Investment Managers
