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2023-Q3

The changing face of growth

Connections Magazine Q3 2023

Reality will bite for central banks

Ariel Bezalel
Investment Manager, Jupiter Strategic Bond Fund - Jupiter

JupiterIn the second half of 2023, Ariel Bezalel and Harry Richards (Investment Managers of the Jupiter Strategic Bond Fund) expect central banks to become more worried about growth than inflation.

Central banks, guided as they are by their main KPIs of managing inflation and unemployment, are having their policy action dictated by two of the most lagging indicators it is possible to find. It is the equivalent of driving a car while looking in the rear-view mirror. But if we look forward out the windscreen, there are a range of leading indicators pointing towards recession.

Money supply growth in the US is deeply negative, deeper than at any time since the 1930s in fact, and this historically has been strongly associated with recessions. Elsewhere, the excess savings which have supported consumption for the past couple of years have now been virtually exhausted, elevated mortgage rates are leading to housing market stagnation, while the S&P 500 has seen negative earnings for two consecutive quarters and CEOs therefore might think hard about their cost base, with the obvious implications for unemployment. 

So is the US headed for recession? Whether or not it enters a technical recession is anyone’s guess, but we certainly feel strongly that the idea of the US economy experiencing a soft landing is wishful thinking at this point. Policy has tightened so much, and so quickly, that it has not yet fully fed through into the real economy. Even if the Fed halted rate rises today (and their rhetoric suggests they might still have one rise left in them before reality bites) then the economy would still keep feeling the impact of that tightening for months to come.

An environment in which inflation keeps rolling over, growth falters, and the employment picture worsens is one in which continued hawkish policy from the Federal Reserve will rapidly become untenable and cuts will follow. In our view this lays the foundation for an extremely promising investment environment for fixed income.

"Our preference is for the more defensive sectors, secured structures and bonds with shorter maturities or nearer term call dates."

The investment opportunity, as we see it, is an enticing one. As we come off the back of one of the worst bond market sell-offs in history, valuations especially in government bonds have gone from expensive to very cheap in our opinion. Away from the world of government bonds, our economic outlook means we have been getting more cautious on credit in aggregate. Credit markets, led by the high yield market, have continued to perform pretty well, but they are not yet pricing in the slowdown that we foresee. But that doesn’t mean credit is without opportunities! However, our preference is for the more defensive sectors, secured structures and bonds with shorter maturities or nearer term call dates.

We have a high level of conviction in our macro view, but of course we know that nothing is guaranteed and there are factors which could de-rail the world from this path, including China generating a rapid economic turnaround, governments stepping in to shield the public from the impact of higher rates (e.g., mortgage rate relief), and a new spike in food price inflation perhaps driven by adverse weather or Russia/Ukraine abandoning existing grain agreements. The world is an unpredictable and volatile place, as we’ve all had ample evidence of in recent years. But the vast breadth of fixed income asset classes available means we have confidence that, whatever fate throws at bond markets, a flexible and dynamic global bond portfolio should have the tools at its disposal to meet that challenge.

Jupiter Strategic Bond Fund https://www.jupiteram.com/uk/en/professional/product-page/jupiter-strategic-bond-fund-i-gbp-acc/

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The value of active minds – independent thinking: A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.

Important information

Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the author at the time of writing, are not necessarily those of Jupiter as a whole, and may be subject to change. This is particularly true during periods of rapidly changing market circumstances.

This document is for informational purposes only and is not investment advice. Every effort is made to ensure the accuracy of the information, but no assurance or warranties are given. We recommend you discuss any investment decisions with a financial adviser, particularly if you are unsure whether an investment is suitable. Jupiter is unable to provide investment advice. Issued by Jupiter Asset Management Limited which is authorised and regulated by the Financial Conduct Authority, registered address is The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ. For investors in Hong Kong: Issued by Jupiter Asset Management (Hong Kong) Limited and has not been reviewed by the Securities and Futures Commission. No part of this content may be reproduced in any manner without the prior permission of Jupiter Asset Management Limited. 26675