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Fed could stop QE this year, warns Stopford
Investec bond fund manager John Stopford expects the US Federal Reserve to stop its QE dollar 'printing' policies this year. Corporate bonds could be heading for trouble, he says.
Bond fund manager John Stopford believes conditions may be in place to persuade US policy makers to turn off the 'quantitative easing' (QE), money printing taps by the end of this year.
With many predicting QE will continue into 2015, Stopford argues 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 with Russell Silberston runs the Investec Global Bond fund, a pick of Citywire Selection, also warns that corporate bonds may be ‘entering bear market conditions’ and he expects credit to 'perform badly’ this year. This echoes a warning by Ignis bond fund manager Chris Bowie who last week said some bonds could suffer 30% capital losses if bond yields (which move in the opposite direction to bond prices) rose in anticipation of higher inflation.
Stopford (pictured) told Citywire he believed US unemployment could fall to the targeted level of 6.5% within months, bringing forward the likelihood of a rise in interest rates.
As a result he has cut the fund's 'duration', which measures exposure to rising interest rates, and added to its holdings in inflation-linked bonds.
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 [debt repayment] 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 bonds 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.’
Yen to fall further
Stopford has also removed the short position (a bet that an asset will fall) he has had against the Japanese currency, although he expects the Bank of Japan to continue to take steps to lower the yen further.
The fund is currently neutral on the euro and exposure to sterling has been removed as Stopford sees the UK’s currency weakening further, while he remains modestly overweight on the dollar.
‘We expect the dollar to be stronger by the end of this year but we think the yen has a further 5-10% to fall and think it to be closer to 100 [yen to the dollar] this year.’
He added: ‘The dollar is following previous patterns. It has been weak for a decade but we expect it to remain stronger on a two to three-year view with most of that probably this year.'
As befits his cautious mind set, Stopford thinks the big opportunity in the asset class this year will be ‘not losing money in the second half of the year’.
While he expects credit to break even, he thinks corporate bonds will have a difficult year with emerging market corporates outperforming their developed world peers, although he queries the distinction between the two.
‘I don’t think the term developed or developing means anything now. It is all about context and labels are changing. On the fringes of developed market debt you have a risk asset like Spain, which should be compared more to Brazil or South Africa.’
Over five years to the end of December the fund has returned 70.1% compared to its benchmark index, the Citigroup WGBI, which generated a total return in dollar terms of 58.3%.
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by Daniel Grote on Feb 11, 2016 at 14:00