The Federal Reserve could cut interest rates by up to seven times in the next 18 months, according to Jupiter’s Ariel Bezalel, who says the biggest threat to markets now is that central banks “don’t just get on with it”.
Bezalel, who runs the Jupiter Strategic Bond fund, said one of the most important questions for investors at the moment is whether we are in a mid-cycle slowdown, similar to those seen in 1995 and 1998, or at the start of an end-of-cycle downturn, as in 2000 and 2008.
And the manager said that after considering the weakness in fundamentals, such as deteriorating PMIs and falling export volumes, he is leaning towards the latter.
“We believe this is likely to be the first of a series of rate cuts,” he explained. “We think the Federal Reserve will cut rates at the end of this month and that there is going to be a fair few more rate cuts over the course of the next 12 to 18 months.”
Bezalel added that the cuts will be necessary to undo the damage caused by raising rates too quickly in the current cycle
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He pointed to a chart of average 10-year bond yields across the UK, Australia, Japan, Switzerland, France and the US showing these figures are at record lows. The manager said that while some of this demand has been driven by the impact of trade wars, a lot of it is down to tight monetary policy.
“Since the end of 2016, we have seen nine rate hikes by the Federal Reserve and we have also seen it reduce its balance sheet by around about $700bn, so from around about $4.5trn to about $3.8trn as of today,” he continued.
“You have got to bear in mind that it takes about 12 to 15 months for a rate hike to filter through to the real economy, so we haven’t really felt the full impact yet, because we had about three rate hikes around about the second half of last year.
“The market is now pricing in around two rate cuts by the end of this year. But we think that it will see three or four rate cuts before the year is out and I think we could see another three rate cuts over the course of next year and the market is only pricing in one rate cut for 2020. So that goes some way to explain why we continue to be bullish on US Treasuries, despite the big rally we have seen year-to-date.”
He added: “I think now the real risk is that central banks just don’t get on with it. I mean yield curves are telling you that policy is too tight and the Fed really needs to get going and cut rates.”
Bezalel said that 2019 has been “a truly fascinating year” for fixed income markets, with $12trn of bonds with negative yields – a figure that has been as high as $13.5trn. There have even been negative yields on some high yield bonds, while about $250bn of emerging market bonds have tipped into negative yielding territory as well.
The manager said the way other asset classes have reacted to this trend further supports the case for a bullish stance on US Treasuries.
“Over the past few years, there has been this strong correlation building up between the quantity of negative yielding bonds and gold,” he added.
“As we have seen of late, as the amount of negative yielding bonds has moved up pretty sharply, the gold price has rallied.
“The gold market appears to be sniffing out another round of aggressive easing by global central banks and perhaps that’s not just rate cuts, but also sniffing out another round of QE from maybe not just the ECB [European Central Bank] but perhaps the Fed again over the next 12 to 18 months.
“And again, the collapse in real rates year-to-date is obviously another factor driving gold prices higher.”
Away from US Treasuries, another area Bezalel is positive on is meat. While China has claimed to have slaughtered up to 20 per cent of its pig heard to help prevent the spread of African swine fever, the manager said independent research carried out by Jupiter suggests this number is closer to 40 per cent and may even be higher.
“In turn we have seen meat prices have been tracking higher with the substitution effect really kicking in, with China shipping in the likes of pork, beef and chicken from all over the world.
“And in the fund, we have been exploiting this.”
Bezalel has been buying bonds from some of the leading meat producers in Brazil and the US, increasing his exposure on any weakness.
These positions have already generated strong performance for him in the year-to-date and he expects to continue seeing double-digit returns.
“It is also worth emphasising the lovely thing about this investment is that recession or no recession, people still need to eat,” he explained. “This is a structural issue that, recession or not, will be with us for a number of years. You could say it is a core part of our portfolio that we are very excited about.”
Data from FE Analytics shows Jupiter Strategic Bond has made 124.48 per cent since launch compared with gains of 98.85 per cent from its iBoxx Sterling Non Gilts All Maturities benchmark and 72.52 per cent from its IA Sterling Strategic Bond sector.
Performance of fund vs sector and index since launch
Source: FE Analytics
The £4bn fund has ongoing charges of 0.74 per cent and is yielding 3.3 per cent.