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Leaviss: What central bankers could learn from that Maradona goal

Leaviss: What central bankers could learn from that Maradona goal

M&G's Jim Leaviss believes central bankers are communicating too much and suggests they should take a leaf out of Argentine football legend Diego Maradona.

Speaking at the M&G Bond Vigilantes conference in London, M&G's head of retail fixed interest highlighted how outgoing Bank of England governor Mervyn King had, five years ago, referred to Maradona's famous goal in the World Cup quarter final against England back in 1986.

Maradona foxed the English defence as he made a beeline for the goal from the Argentine half and King had indicated the Bank should also not give too much away when conducting its strategy as he drew comparisons with the goal.

However, Leaviss feels King and other central bankers have lost sight of this and by over-communicating have caused the panic in markets.

'Maradona didn't move to the right or left, he went straight for goal. All he did was move his eyebrows and shoulders and scored. Central bankers have been telling markets to much.'

'Central bankers don't keep markets guessing enough, they are communicating too much. This is a lesson for new Bank of England governor Mark Carney, he really needs to think about the Bank's communication strategy.'

Leaviss used the interrogation of US Federal Reserve chairman Ben Bernanke on 22 May as a case in point. He said because Bernanke indicated quantitative easing would be scaled back it caused a sell off in equities and bonds, which is a reason why we have got a 1994-like situations.

While Leaviss accepts it will be impossible for the Fed to take the 'punch bowl' away immediately, he believes the withdrawal will now have to be set in motion after Bernanke's comment otherwise he will lose face.

Leaviss is particularly concerned about the reaction in US mortgage rates to Bernanke's comments.

'In the past month Treasuries have gone up by around 100 basis points and most worrying for me has been the impact in the US housing market where mortgage rates have gone up by a similar level,' he said. 'This could slow the US housing recovery and everything looks like it's heading for a perfect storm. While the impact on the housing market is not a drastic worry, it's a cause for worry at the moment.'

Leaviss aired his views as his firm launched the M&G YouGov Inflation Expectations Survey.

The survey, which measures expectations on a 12-month and five-year view in nine countries across the globe, revealed that consumers in the UK and Europe expect inflation to remain persistently above central bank targets and that they have little confidence in policymakers.

'It's not surprising that the results of the M&G YouGov Inflation Expectations survey show consumers expect inflation to remain above target at 2.7% in one and 3% in five years' time,' Leaviss said.

'UK inflation has been persistently above the Bank of England's 2% target for more than three years and these survey results will concern the Bank, which needs to keep inflation expectations well anchored despite elevated inflation readings.'

Against this backdrop, Leaviss is staying well clear of emerging market debt in his M&G Global Macro Bond fund.

'For every $1 billion the Fed has plunged into its balance sheet, around $1.5 billion has gone into emerging market debt. In 1994 most of the damage was done in EMD and if you think QE is going to be tapered to than be very nervous about EMD.'

Leaviss also said he is starting to add duration to the fund, while reducing credit risk, which has seen his exposure to high yield fall to 10%.

This differs to colleague Richard Woolnough,  who has been increasing his M&G Optimal Income fund's exposure to credit risk since Bernanke indicated QE is coming to an end. This has seen the high yield element of the fund rise from 23% to 30% over the last month or so.

'You are getting paid well for taking credit risk and that's what we're doing with our portfolio,' Woolnough said.

'The UK recession is not as bad as people think. There's lots of good news out there but people are looking for the bad news.'

Carney

Ben Lord, who co-manages the M&G UK Inflation Linked Corporate Bond fund with Leaviss, hopes Carney's inflationary stance won't cause tension in bond markets.

'Carney is more radical and is likely to allow inflation to veer substantially above expectations. We hope he doesn't allow it to get out of control and keeps bond markets calm.'

Lord pointed out  buying inflation protection is cheap now as the market is under-estimating the impact.

'Five-year index-linkers are suggesting inflation of 2.6% and it think inflation will be higher. Five-year index linkers look staggeringly cheap,' Lord said.

'I believe a strategy of short duration with inflation protection will be a very profitable strategy over the next 10-20 years.'

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