In 2022, there was an extreme amount of monetary tightening. As this tightening feeds through economies over the next 12 to 18 months, growth should soften further. Indeed, PMIs are already pointing south in many regions of the world. Interestingly, the new orders component of the PMIs is showing this in an even more pronounced way.
Furthermore, confidence from CEOs, which can drive investment and hiring intentions, is at very depressed levels. Consumers are facing tough times in many countries with negative real growth for wages, increasing credit card debt and pretty depressed sentiment. Consumption, which is roughly 70% of GDP in the US, should therefore be watched closely as the year unfolds. Tighter financial conditions are driving down activity in housing markets, with prices decreasing across most regions in a meaningful manner.
Should cost-push inflation fall back as expected and commodity prices ease, central banks will change their stance with regards to monetary policy. We still see rate cuts in the second half of 2023 as a solid possibility from the US Federal Reserve, and in that scenario government bond yields should keep receding. Additionally, financial stability risks or rising unemployment can bring forward a pivot in central bank policy.
Falling house prices, the third point of our inflation outlook, leads us to take a very constructive view on government bonds particularly in the United States, Australia, New Zealand and South Korea, where we expect much lower government bond yields going forward, with the potential for compelling total returns.
While we have high conviction that central bank policy will change as growth slows, and better times lie ahead for bond investors, the timing will always be uncertain. In the past, however, yields have moved a long way quickly when central banks pivot on policy. Fortunately, given the rise in yields we saw last year investors are now being ‘paid to wait’ with a much more attractive income return than has been available for many years.
This implies that the classic negative correlation between government bond yields and spreads might reassert itself, rewarding a diversified barbell strategy such as the one we employ in our own strategy. While we think that credit investors are currently being paid to wait, we do believe that government bonds can offer not only the potential for positive returns but also an important hedge to counter volatility in credit.
Our strategy’s asset allocation, when paired with scrupulous credit selection aimed at avoiding default situations or permanent loss of capital, can help to deliver strong risk-adjusted returns, especially during moments of higher volatility for credit markets.
The value of active minds: independent thinking
Get in touch
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.
This communication is intended for investment professionals* and is not for the use or benefit of other persons, including retail investors. This communication is for informational purposes only and is not investment advice. 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(s) 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. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given. Issued in the UK by Jupiter Asset Management Limited, registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ is authorised and regulated by the Financial Conduct Authority. Issued in the EU by Jupiter Asset Management International S.A. (JAMI), registered address: 5, Rue Heienhaff, Senningerberg L-1736, Luxembourg which is authorised and regulated by the Commission de Surveillance du Secteur Financier. Issued in Hong Kong by Jupiter Asset Management (Hong Kong) Limited (JAM HK) and has not been reviewed by the Securities and Futures Commission. No part of this [commentary] may be reproduced in any manner without the prior permission of JAM, JAMI or JAM HK.
*In Hong Kong, investment professionals refer to Professional Investors as defined under the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) and in Singapore, Institutional Investors as defined under Section 304 of the Securities and Futures Act, Chapter 289 of Singapore. 61