DIY Investor Magazine
/
March 2017
45
Furthermore, there is evidence that money supply
growth has been declining in China and the US in
recent months.
Given that monetary changes usually lead activity
swings by between six and 12 months, this indicates
a mild slowdown around spring time this year. We
therefore believe that consensus positioning has gone
too far and this is, perhaps, a sign that the reflation trade
may soon have run its course.
All in all, this is not an unusual picture and does not in
our opinion represent a regime change; it simply reflects
the normal ebb and flow of economic cycles.
BEING PRAGMATIC
As bond investors our focus is on income, while we try
to also preserve capital for our investors. Although we
believe that the current run of inflation will likely tail off
by the second half of the year, we tend to manage our
portfolios pragmatically.
In 2016 we kept an open mind on duration (interest rate
sensitivity) with a view to potentially extend or lower it
within our portfolios subject to how the world economies
behaved.
Thus we profited by positioning for the different policy
responses that were expected post Brexit and the
election of Trump.
This was achieved by increasing duration following
Brexit, which brought about a monetary policy response,
and aggressively cutting it post Trump’s election, which
led to a rise in expectations for fiscal policies aimed at
growth.
Going forward, given low default rates in Europe,
while those in the US have also peaked, should the
consensus prove correct, we would view any sell off in
bonds as an opportunity to find quality investment grade
US corporate bonds. To us, the current yield levels
present more of an opportunity than a threat.
The biggest threat to our portfolios to our mind is a
systemic risk in Europe as a result of politics.
We continue to favour sensible income from large, non-
cyclical businesses, which are most likely to continue
paying their coupons in the years to come. In 2017,
coupons should look after investors reasonably well.
Past performance is not a guide to future performance.
The value of an investment and the income from it can
fall as well as rise and you may not get back the amount
originally invested.
The information in this article does not qualify as an
investment recommendation.
