InvestmentsJun 27 2019

Jupiter bond boss warns investors are too complacent

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Jupiter bond boss warns investors are too complacent

Ariel Bezalel’s comments come in the context of both the US Federal Reserve and European Central Bank bosses warning deteriorating economic conditions might lead to interest rate cuts.

Bank of England governor Mark Carney recently told the Treasury Select Committee that UK interest rates may be cut if the UK leaves the European Union in a “disorderly” manner. 

Mr Bezalel said the market’s reaction to the change in outlook had been to buy risker assets on the assumption that rate cuts would prevent a recession.

But he believes the market was being “complacent” in its attitude to the possibility of recession.

He said: “The direction of central banks could not be more different to last year, when rate hikes and balance sheet reduction was the order of the day. The US Federal Reserve has signalled it will consider lowering interest rates due to 'uncertainties' in the economic outlook and continued subdued inflation.

"The European Central Bank has gone further, given negative interest rates, with Mario Draghi calling for additional stimulus if weak economic data and flagging inflation doesn’t pick up.

"In my opinion, there is a lot of complacency in risk assets as investors get sucked into a whole array of assets without understanding the true risks. It’s been my belief for a while that the US economy is nearing the end of its economic cycle and is getting closer to the next recession.

"This is based on a multitude of macro and market warning signals, from the rise in 'covenant-lite' credit and 'zombie' firms kept alive by low rates, to persistently deteriorating trade data in key hubs across Asia and Europe, record household and corporate debt, and flattening/inverting yield curves. The global PMI for manufacturing has now registered 13 consecutive downticks, slipping into contraction territory in May.”

Mr Bezalal said the global economy was beginning to resemble that of Japan, with low unemployment counter-intuitively happening at the same time as low inflation, and the economic lesson from Japan in recent decades is that constantly cutting interest rates has not acted as a spur to higher economic growth.

Maya Bhandari multi-asset portfolio manager at Columbia Threadneedle said she had responded to the recent market conditions by reducing investments in equities, and buying bonds, as she believes company profits won’t rise, meaning there will be less cash for shareholders, but the bond holders will still get paid. 

Bruce Stout, who runs the £1.7bn Murray International investment trust said wrote in his latest update to shareholders: “The difficulty of delivering decent corporate profits and dividends towards the end of an extended business cycle such as the one currently being experienced in the debt-dependent developed world has arguably become even tougher as global trade disputes intensify.

"Clearly great caution must continue to be exercised. Yet for those nations in Asia and the emerging world where intra-regional trade and domestic growth agendas continue to dictate economic policy, the prospects for lower interest rates and rising corporate earnings remain largely unchanged.” 

David Scott, an adviser at Andrews Gwynne said global central banks had cut interest rates a decade ago to stimulate economic growth and it failed, so reverting to the same policy again as economies slow was an admission that the economic policies pursued over the past decade had failed.

He has deployed client capital into gold and other safe haven assets, and away from equities.   

david.thorpe@ft.com