A lot of the fear in markets was around inflation, and central bankers have arguably fallen short in their attempts at giving policy guidance to markets. Don’t forget that in 2021 the Federal Reserve was talking about ‘average inflation targeting’ and saying it would be prepared to let inflation run hot and not be too proactive with policy. Yet in 2022 the Fed moved rates from 0.25% to 4.5%.
At the same time as this turmoil around inflation and interest rates, there was obviously also a lot of geopolitical strife. A lot could be said about the outlook for inflation and interest rates (which I’ll get to later) but we know that this is essentially a cyclical process. Geopolitical tensions are a different story, and unfortunately I expect geopolitical concerns to remain an issue in 2023 and probably for at least a few more years thereafter. Even aside from Russia’s actions, we know we’re moving from a unipolar world of US dominance following the end of the Cold War to a bipolar world where China is an ever more viable challenger to the US sphere of influence both economically and militarily.
Heightened non-linear risks are something that active fund managers need to be aware of. My own specialism is global sovereign bonds, and issues I’m keeping a close eye on are China/Taiwan – where for example a short position in the Taiwanese dollar seems like a sensible hedge to me. In the gulf region, countries such as Saudi Arabia and the UAE have historically been aligned to the US, with oil contracts denominated in US dollars and a flow of militarily contracts going in the opposite direction. Yet last year Saudi Arabia announced an oil deal in Chinese yuan, which could indicate the start of a shift in loyalty for the region. Global sovereign bond markets aren’t really priced for a lot of volatility in this region, so it’s an area where investors can buy relatively cheap protection, taking short exposure without having to pay much for it.
After a such a brutal year in 2022, it was notable that last week there was a point at which there were no longer any negative-yielding sovereign bonds in the world. Yield returning to the asset class is a real silver lining for bond investors. It is, after all, supposed to be an income asset class at its core. Investors are now being paid to wait, with even portfolios of high-quality bonds yielding in the high single digits, with high yield portfolios in the double digits to compensate for the greater credit risk.
How to manage credit risk will be key for bond investors in 2023. We’re headed for recession, and so I expect fears about duration will be replaced by fears about credit quality. Inflation is at or around its peak now, I believe, and although central bankers are still talking tough I think we may even see a deflationary shock at some point this year as recession starts to bite on the economy and base effects naturally weigh on headline inflation figures. The US economy has been resilient so far when other places in the world have struggled, but forward-looking indicators have become notably softer so I see a lot of downside risks to growth in 2023.
In that kind of environment is important to be careful about credit risk, to stay active, and do detailed due diligence on individual issuers as defaults will surely rise and avoiding them is key to outperforming in this asset class.
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.
Get in touch
This document is intended for investment professionals* and is not for the use or benefit of other persons, including retail investors, except in Hong Kong. This document 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 individuals mentioned 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 the information, but no assurance or warranties are given. Holding examples are for illustrative purposes only and are not a recommendation to buy or sell. Issued in the UK by Jupiter Asset Management Limited (JAM), 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. For investors in Hong Kong: Issued by Jupiter Asset Management (Hong Kong) Limited (JAM HK) and has not been reviewed by the Securities and Futures Commission. No part of this document may be reproduced in any manner without the prior permission of JAM/JAMI/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. 19