Investec's Stopford: QE could be switched off by end of 2013
Experienced bond manager John Stopford expects the QE taps to be turned off later this year and warns that corporate bonds could be heading for bear market conditions.
by Matthew Goodburn on Feb 05, 2013 at 10:12
With many predicting that QE will continue into 2015, Stopford argues that the main factors that would bring about its end, the return of inflation and a fall in US unemployment, could come around quicker than anticipated.
Stopford, who also runs the Investec GSF Global Strategic Income fund also warns that corporate bonds may be ‘entering bear market conditions’ and he expects credit to 'perform badly’ this year.
Stopford told Citywire Global that he believed US unemployment could be down to the targeted level of 6.5% within months, bringing forward the likelihood of a subsequent rise in interest rates.
He is positioning the fund to deal with the scenario by cutting duration on his government bonds, and adding to his inflation–linked exposure.
He said: ‘It is hard to be a dollar bull but the US does appear to be having a normal cycle again. The housing market has picked up, consumers are starting to spend and banks are lending again so we could get much faster to the point where the Fed has to change fiscal policy. We expect QE to finish by the end of 2013.
‘The [Federal Reserve] has said it would like to start reining back on QE so if we see an improvement in the labour market the QE argument becomes less powerful.’
Despite acknowledging concerns among some Federal Reserve members over the $3 trillion of debt on the US balance sheet, Stopford concedes that the US is ‘further through the private sector deleveraging cycle and reassuring manufacturing and employment data is making it more competitive than for some time’.
The fund is 60% weighted to developed market sovereign debt with its largest positions in US 2014 and 2012 - dated treasuries while investment grade corporates, primarily in AAA rated companies, make up 17% of the fund. Cash accounts for almost 8%.
Stopford is seeing signs of tension in credit markets with weaker companies coming to market and more speculative borrowing.
He has been gradually decreasing his overall credit exposure from its historic peak in 2009, and has reduced bonds in cyclical companies including financials further this year, taking the fund underweight credit for the first time in three and a half years.
‘We are seeing weaker borrowers and bonds displaying less bond-like but more equity-like characteristics. All of that makes us quite cautious.’
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