Vijay Murik

Australia’s leading government bond manager, Jamieson Coote Bonds (JCB), has appointed Vijay Murik as Associate Director and Portfolio Manager/Strategist, further strengthening its fixed income investment capabilities in response to today’s complex and rapidly changing market environment.

JCB Chief Executive Officer Paul Chin noted, “This appointment reflects JCB’s commitment to enhancing its investment team to navigate heightened market volatility, shifting central bank policies, and the evolving needs of our investors.”

Vijay will lead alpha generation initiatives and provide advanced macroeconomic and market analysis across JCB’s domestic and global government bond portfolios. JCB identified that an individual of his expertise will enhance the firm’s disciplined approach to duration management and security selection, reinforcing its ability to deliver resilient, risk-aware outcomes for clients.

Vijay joins JCB with extensive experience across the Australian Office of Financial Management (AOFM), Vanguard, the Parliamentary Budget Office, and the Australian Treasury. He began his career at the AOFM as a Quantitative Analyst, before moving to Vanguard as Senior Fixed Income Trader. Returning to Canberra, he served as Assistant Director at the Parliamentary Budget Office and most recently at the Australian Treasury, covering global financial markets, central bank policy, and financial regulation.

Vijay holds a PhD in Finance, specialising in monetary policy pricing and credit and liquidity risks, a Bachelor of Laws (with First Class Honours), a Bachelor of Finance (with First Class Honours), and a Bachelor of Actuarial Studies. He brings a rare combination of academic rigour and market experience to enhance JCB’s portfolios.

Paul Chin said the appointment is an important milestone in the firm’s long-term strategy to enhance its investment capabilities and respond to the changing needs of markets and investors.

“The strength of our portfolios lies in anticipating and adapting to market complexity. Vijay’s expertise deepens our intellectual capital and sharpens our focus on delivering strong portfolio outcomes in any environment,” Paul Chin said.

Commenting on his appointment, Vijay Murik said: “Fixed income markets are evolving faster than ever amid unprecedented volatility, shifting central bank policies, and structural shifts after decades of declining yields. Investors demand adaptive strategies that can navigate rising yields, liquidity challenges, and a complex global supply-demand landscape. I’m thrilled to join JCB and contribute to their disciplined, research-driven approach, combining deep macroeconomic insight with active portfolio management to help clients confidently capture opportunities and manage risks across domestic and global government bond markets.”

This appointment highlights JCB’s commitment to building a top-tier investment team equipped to navigate the intricacies of global fixed income markets. In a landscape offering attractive yields but demanding active, informed management, JCB continues to provide clients with the skill, insight, and confidence needed to achieve stable income and liquidity, and strong total returns.

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James Wilson

James Wilson has joined the high grade fixed income specialist investment team as Senior Portfolio Manager, working alongside Chief Investment Officer Charlie Jamieson, based in Melbourne.

James joins from VFMC where he was most recently Senior Portfolio Manager, Fixed Interest and Absolute Returns, managing global and domestic active fixed income portfolios. Prior to that James spent seven and half years at ANZ as a senior rates trader in Sydney and London. It was at ANZ that James first worked alongside Executive Director, Angus Coote. James brings with him more than 15 years’ experience across domestic and global fixed income markets. He is also a member of the finance committee for not-for-profit charitable organisation, Bayley House.

Jamieson Coote Bonds Chief Investment Officer, Charlie Jamieson said: “We’re very proud of the outcomes we have been able to deliver for our clients to date and we are keen to enhance and grow our offering. The appointment of James is another important investment in our business and will strengthen our team approach and ensure we are best placed to continue to deliver strong returns for our investors.”

Senior Portfolio Manager, James Wilson said: “I am excited to be joining the team at Jamieson Coote Bonds at a time when the business is growing its retail and institutional footprint and portfolio breadth. Jamieson Coote Bonds has rapidly become one of the most respected brands in the domestic fixed income market and I am very much looking forward to being a part of the journey going forward.”

Co-founders Charlie Jamieson and Angus Coote launched Jamieson Coote Bonds in 2013 to enable investors to access disaggregated exposure to high grade fixed income and now manages A$5 billion on behalf of superannuation funds, wholesale and retail investors (as at 31 October 2021). The most recent strategy − a global absolute return high grade fixed income strategy – is performing well despite the wider negative headline performance numbers of bonds and has amassed A$500m in funds under management in a short time, since its inception in December 2019. In addition to its Melbourne investment team, Deputy Chief Investment Officer Kate Samranvedhya, and Assistant Portfolio Manager Ben Wang reside in its Singapore office. Jamieson Coote Bonds is backed by non-investment services partner Channel Capital.

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High-grade bonds grind out returns and dampen risky asset exposures, even in a muted yield environment.

Sovereign bonds have the potential to support investor returns during periods when countries pursue unconventional monetary policies.

As lacklustre economic conditions persist around the world, large-scale, high-impact strategies such as zero interest rates and negative interest rates are being carefully considered by central banks across the world. They are likely to become increasingly mainstream and it’s important for investors to understand what their effects may be.

This is the final instalment in a three-part series exploring the effect of unconventional monetary policies on economies and financial markets. In the previous piece we looked at Japan and Germany’s approach to unconventional monetary policies. In this story, we’ll look at the impact they have had on different asset classes, with a special focus on sovereign bonds.

Investors have been forced to take on more risk in pursuit of returns or yield as central banks have lowered interest rates to near zero, zero or less. As such, investors have had to move up the risk spectrum to generate returns, while being penalised for holding onto cash given the low interest rate environment.

This has encouraged investors to allocate funds to more speculative assets such as emerging market debt, leveraged loans and private equity. But, while these instruments offer attractive yields, they also carry material, and often hidden, risks. With return expectations falling given myriad nearer-term economic headwinds, risk has been cheapened by these policies and risen in investor portfolios. These are typical features of a late-cycle environment.

At the same time, central bank rhetoric has altered investor beliefs. When poor economic data is released, central banks have further eased monetary policy, a strategy that has become increasingly ineffective. More and more accommodation is required just to maintain economic growth.

Risky assets rally hard in this environment. But markets have been lulled into a false sense of security. This has the potential to wrong-foot investors, especially in times of crisis.

Where to from here?

The world continues deeper into a late-cycle phase, one in which investors are encouraged by policy makers to reach for yield and return in an increasingly uncertain time. Thoughtful portfolio construction is one of the keys to navigating these difficulties.

As the Japanese experience demonstrates, traditional asset classes such as cash endure difficult outcomes under these conditions. Bonds are the exception. They can offer compounding qualities that prove invaluable in a low-return environment.

Investors who have tilted their portfolios towards risky assets such as shares and property have been conditioned since the GFC to believe returns are virtuous and markets are supported by central banks doing ‘whatever it takes’ to maintain an even economic keel. This is understandable when considering the strong performance shares and property have enjoyed in recent years. But this environment is unlikely to persist.

Against this backdrop, high-grade sovereign bonds have an enduring and a nearer-term role to play. While forward return expectations for all asset classes are somewhat dampened relative to historic trends, high-grade sovereign bonds offer benefits such as diversification.

High-grade bonds grind out returns and dampen risky asset exposures, even in a muted yield environment. They also deliver compound income over time and provide constructive returns. And, while their returns are likely to be moderated relative to trend, high-grade sovereign bonds offer protection against cyclical downturns and risky assets.

They also enjoy other advantages such as being backed by highly-rated governments including Australia which, alongside Canada and Switzerland, is one of three AAA-rated countries with wide scale, functioning bond markets. As stable and well-regulated nations, investors are confident governments can make good on their ongoing debt obligations, which supports the sovereign bond market.

Given the uncertainty and rising pressures in financial markets, proven sources of defensiveness and diversification such as sovereign bonds should help investors mitigate inevitable market pitfalls. In fact, there’s a case for having both domestic and global high-grade sovereign bond exposures in portfolios.

Central banks are likely to continue to use unconventional monetary policies in a persistent low-rate environment. As a result, it’s worthwhile for investors to consider the role of sovereign bonds in their portfolio to help mitigate risk and generate returns.

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Japan has had a number of forays into zero interest rates.

The Japanese and German approaches to unconventional monetary policies have not always produced the outcome central banks desired.

Japan and Germany are two nations that have used unconventional monetary policies to stimulate economic growth, albeit for different reasons and under different circumstances. Here, the second article in a three-part series on unconventional monetary policies, we explore the backdrop to the decision by these countries to embark on zero and negative interest rates and quantitative easing.

Japan has had a number of forays into zero interest rates. One was in February 1999 and it embarked on another round two years later in response to the dot.com bubble bursting. In addition to moving into negative interest rates, in 2001 the country also pursued a program of quantitative easing. This lasted until July 2006 when the Bank of Japan (BoJ) began to normalise rates. A decade later in January 2016, the BoJ again adopted negative rates, mostly to prevent an unwelcome strengthening of the yen from hurting the export-reliant economy.

When the BoJ first introduced unconventional monetary policies, its approach was viewed to be extreme and isolated to Japan. But only a few years later thanks to the financial crisis of 2007 and 2008, the US Federal Reserve (the Fed) and the European Central Bank (ECB) took a similar approach.

The response to unconventional monetary policy

The BoJ’s accommodative monetary policies were designed to stimulate economic growth. But instead, they prompted a number of unexpected outcomes.

Japanese households ignored the easy money and ended up saving more and spending less. This suppressed demand, which added to the country’s economic troubles. Concurrently, a credit crunch emerged as the Japanese banks’ bad and doubtful debt exposures accumulated. Small, medium and even some large-sized businesses were unable to repay their loans.

The property market played a key role in the economy as this situation played out. The frothy commercial property market that was one of the main features of the Japanese market in the 1980s and ‘90s suffered immensely in the crash. It has never fully returned to pre-boom levels.

As chart above shows, from 1991 the commercial property sector endured fourteen consecutive years of falling valuations, a trend that challenged the notion property investments are safe and accretive. Simultaneously, rental levels plummeted as economic activity remained anaemic. Property owners who had enjoyed double-digit yields at the peak of the bubble subsequently saw the value of their property drop below the value of their outstanding debt.

Meanwhile, low growth and deflationary pressures weighed on the Japanese sharemarket. Equities reached historic lows in 1989 and the market subsequently saw a number of false dawns. This was because corporates focused on restructuring balance sheets and paying down debt rather than growing their enterprises through borrowing at highly attractive interest rates.

Germany’s experience

Germany is another country where unconventional monetary policies have been used to try to reboot a lacklustre economy.

Its industries have been weighed down by China’s economic rebalancing, the global trade war and evolving consumer trends. Investment spending has receded, the labour market is tepid and business and consumer confidence is soft. Additionally, the aging demographic acts as an anchor on productivity growth and contributes to banking sector weaknesses. On top of this, weak lending, high operating cost bases and poor profitability in the face of low interest rates are acting as handbrakes on economic output.

Germany’s monetary policy is decided by the European Central Bank (ECB). In 2012 it introduced zero interest rates, followed by negative interest rates of -0.1% from June 2014. While these measures were viewed as extreme, credit growth had been stagnant and the central bank wanted to encourage lending to make it punitive for banks to store excess cash. Nevertheless, German and other northern European region banks still store close to €1.25 trillion in excess reserves. So money has not flowed freely across the economy, adding to the malaise.

Unconventional monetary policies have caused European share markets to rally, although financial sector stocks have not performed as well as defensive shares. Overall, however, the economy remains soft and policymakers continue to explore all options to support economic activity.

In the next instalment of this three-part series we’ll explore lessons from Japan’s and Germany’s use of unconventional monetary policies.

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Interest rates are one of the most important factors that influence financial markets.

There’s plenty of lessons for other markets from Japan’s experience with zero interest rates and quantitative easing. 

The uncertain economic outlook has prompted the Reserve Bank of Australia (RBA) to consider employing unconventional monetary policies to stimulate growth. Should the central bank choose to go down this path, Australia would follow the lead of a number of other nations. There is much local investors can learn from the overseas experience. In this piece, the first in a three-part series, we explore why countries choose to pursue unconventional monetary policies.

Interest rates are one of the most important factors that influence financial markets. They impact the cost of borrowing and returns on many assets, including cash. Combined with other elements, such as 10-year yields on government bonds, interest rates also provide insights into the health of the economy and inflation. This is vital information when constructing investment portfolios.

In response to an uncertain economic outlook, central banks from many of the major developed markets have kept interest rates at exceptionally low levels. In some countries, rates have even been negative. These are examples of unconventional monetary policies.

In recent history, Sweden was one of the first countries to explore unconventional monetary policies. Its central bank, the Riksbank, introduced negative rates in July 2009 by cutting its overnight deposit rate to -0.25%. Then in June 2014, the European Central Bank (ECB) lowered its deposit rate to -0.10%. Other European countries and Japan have since implemented negative interest rates. In Australia, in 2019 the RBA discussed the use of unconventional policies such as negative interest rates or buying government bonds to effectively lower longer-term interest rates and generate activity.

While each situation is unique, there are many lessons that can be applied from these events to what is happening in financial markets today.

A rationale for unconventional measures

When central banks resort to unconventional policies such as quantitative easing, the indicators suggest the economic outlook and environment are typically fraught and fragile.

For example, they were used in Japan in late 1991 and early 1992 after asset prices collapsed following a period of economic excess and inflation. In the mid-1980s Japan had an extremely dynamic economy, with annual GDP growth of around 4%. At the market’s height in 1989, Japan accounted for 45% of the global sharemarket by market capitalisation. But soon after, it succumbed to one of the longest-running economic crises in financial history, a period dubbed “the lost decade”. By 2019, Japan’s share of the global bourse had fallen to just 7%. Recessionary conditions were long-lasting and profound, and extreme measures were needed. This is why Japan decided to introduce quantitative easing.

In part two of this series, we’ll further explore Japan’s, as well as Germany’s, approach to unconventional monetary policies.

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Charles Jamieson

The CC JCB Global Bond Fund (Fund) managed by specialist high grade bond manager Jamieson Coote Bonds (JCB), has been added to Macquarie Investment Manager/Consolidator, Macquarie Super Manager/Consolidator and HUB24 (IDPS and Super) menus, broadening the access to JCB’s global sovereign bond strategy.

Co-Founder and Chief Operating Officer Angus Coote said “We have seen the demand from advisers for this strategy increase due to the risk-off environment created through the ongoing trade tensions and geopolitical flares, the prospect of low to negative interest rates remaining, and a weak Australian dollar (AUD). These themes in combination are providing negatively correlated returns for portfolios in our Unhedged Global Bond strategy that has delivered a return after fees and costs of 14.92% p.a., and 7.45% p.a. (as at 31 August 2019) for our Hedged Global Bond strategy, since inception on 26 February 2019.”

“The Fund is designed to give investors global diversification within their fixed income allocation and can complement domestic risk asset exposures by helping to improve risk-adjusted returns, particularly at this time of uncertainty, where liquidity and transparency are key.” Mr Coote said.

The Fund provides a highly defensive allocation across the G7 Governments and offers both currency hedged (Class A) and unhedged (Class B) classes, giving investors the flexibility to switch between $AUD hedged (to $USD), and $AUD unhedged, at no additional cost.

The Fund is also available on the following supporting platforms; Asgard, Ausmaq, Australian Money Market, BT Wrap and BT Panorama, Mason Stevens, Netwealth (IDPS), Praemium and Powerwrap.

The Fund is managed by Chief Investment Officer, Charlie Jamieson and Deputy CIO Kate Samranvedhya, based in Singapore. Jamieson Coote Bonds currently has A$4 billion of assets under management for both institutional and retail investors.

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Charles Jamieson

Global trade data has been slowing rapidly over 2019, but last week’s US employment report was a dire warning, and can expedite the US Federal Reserve (the Fed) towards rate cuts later this year.

US employment was weaker at a headline level, with revisions and average hourly earnings also slipping backwards, a trifecta of slowing US employment data. Trade wars and slowing global growth will likely see this continue.

Is the Fed right at the start of its rate cutting journey?

It has 250 basis points, or 10 rate cuts of 25 basis points to possibly move to a zero cash rate, plus additional Quantitative Easing (QE) if required. Compare that to AUD interest rates, where we think we have received 1 of 4 possible cuts towards a 0.50% RBA cash rate (we would expect the RBA to do its own QE once a 0.50% RBA cash rate was achieved).  US Government bonds will have a powerful tail wind blowing firmly at their back should the Fed cut interest rates, as many commentators are now suggesting. Such moves could provide strong winds of performance and return for investors in defensive strategies with strong exposures to US Government bonds.

As we’ve all now experienced from AUD interest rates over the last six months, the major challenge for investors remains how to view this allocation in a ’forward’ context.   Investors who did not pull the trigger in AUD rates should be highly motivated now, given the powerful portfolio performance they have missed. A few people have now admitted that cash has burnt a solid hole in their own portfolio attributions, particularly in the fourth quarter of last year. With the Fed possibly at the start of their own rate cutting journey, the gift of a second chance may have arrived for defensive asset holders.

Is this likely an ’insurance’ cutting cycle or something bigger?

In 1987, ‘95 and ‘97 the  Fed cut interest rates by 75-100 basis points to be ‘ahead of the curve’. This stimulus worked, and the US economy and investment cycle was saved by the Fed providing some cycle ‘’insurance’’ to the market. In this instance you bought bonds, but didn’t need them to save the day for portfolios as most assets valuations held up thanks to the Fed that stayed ‘ahead of the curve’. The returns from bonds were strong during these times. Any rate cuts are usually good for Government Bonds.

But if the Fed falls ’behind the curve’ it has  to cut rates much deeper. Rate cutting cycles of 1985, 1989, 2000 and 2007 required 300-500 basis points of cuts. Today we would have a problem delivering this as the Fed only has 250 basis points as a starting point.  If the Fed is ‘behind the curve’ there is a chance it will use the lot plus more in QE.  This is when bonds will likely deliver exceptional returns, performing whilst other assets might be challenged, depending on the reason for cuts (especially if credit problems arrive). The GFC was a classic example of this.

We think these investment themes are powerful and any allocation arguments are highly compelling.  The last Fed cutting cycle started more than 12 years ago.  It could be years and years until investors get this type of set up again.

A ‘flight to quality’ at a time of uncertainty

Monetary policy and other macroeconomic fundamentals remain the key drivers of bond market performance and can vary between countries, meaning returns can also differ. Diversification across countries can help to reduce overall portfolio risk. In addition, a global bond allocation can deliver Australian investors returns from multiple sources:

• Bond coupon or income – highly likely, as long as governments stay solvent.
• Foreign Exchange (FX) forward hedging benefit – highly likely if AUD rates are higher than some peers (currently EUR and JPY).
• Bond capital gains – compelling and likely if the Fed cuts rates.
• Alpha generation – good managers should be able to generate alpha (additional return beyond the index) over time.
• AUD FX depreciation (only in an unhedged class allocation) – this is harder to predict, but a huge possible return driver as seen in the GFC.

A strong tail hedge solution for Australian portfolios

In our own global bond fund strategy, we consider these five levers when actively managing the portfolio.  AUD FX is the hardest to predict. In serious times of crisis, the AUD has historically depreciated more often, than not. During the GFC this was hugely material, with the AUD depreciating from 0.9850 on 15 July 2008, to just 0.6009 on 27 October 2008, providing substantial returns for holders of global bonds on an unhedged basis. The period during the GFC produced a top to bottom move in $AUD versus $USD of +63.92%. Added to the powerful performance of bond markets in that period made a global bond allocation an amazing negative correlator/buffer to the equities losses that were suffered in 2008.

By Charlie Jamieson, CIO

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Ben has spent most of his career in investment management, most recently as Vice President, Investments at Wah Hin and Co (Pte) Ltd – a Singapore based Family Office, and prior to that, three years as a performance analyst at Aberdeen Asset Management, also in Singapore.  He has a Ph.D. in Economics from the National University of Singapore and is a Chartered Financial Analyst Charter holder.

Jamieson Coote Bonds opened its Singapore office late in 2018, hiring Kate Samranvedhya as Deputy Chief Investment Officer (from the Hong Kong Monetary Authority) and further adding to its deep experience in managing sovereign portfolios across global markets.

Jamieson Coote Bonds Executive Director and Chief Investment Officer, Charlie Jamieson said: “A key area of growth is to expand our global presence and strengthen our investment capability. Our investment process relies heavily on actively monitoring global markets and fundamentals, policy, politics and supply implications, to mitigate downside risk. With Kate and Ben on board in one of the key financial centres in Asia, we can further enhance our investment process and ability to deliver return outcomes for our investors, at a time of great uncertainty in markets.”

Commenting on the appointment, Deputy Chief Investment Officer Kate Samranvedhya said “Ben’s analytical and quantitative skills, macroeconomic and asset allocation experience, combined with perspective from his native China give our team additional strength and diversity of views.”

Jamieson Coote Bonds recently offered its global investment strategy to the broader Australian investor market, through the launch of the CC JCB Global Bond Fund (the Fund), an Australian priced unit trust. The Fund is designed to give investors access to global diversification and stable bond income through highly rated government issuers represented in the G7. JCB has been actively managing its global strategy since February 2018.

JCB currently manages A$2.5 billion of assets under management for both institutional and retail investors.

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Charles Jamieson

Specialist high grade bond manager Jamieson Coote Bonds (JCB) is offering its global investment strategy to the broader Australian investor market, through the launch of the CC JCB Global Bond Fund (the Fund), an Australian priced unit trust.

Designed to give investors global diversification within their fixed income allocation, the Fund can complement domestic risk asset exposures by helping to improve risk-adjusted returns, particularly at this time of uncertainty.

Co-managed by CIO Charles Jamieson and Deputy CIO Kate Samranvedhya, the global investment strategy provides an active way to gain country diversification and earn stable bond income through highly rated government issuers represented in the G7. Its investible universe includes global Sovereigns, Semi-Government, Agencies and Supra-Nationals in the core G7 defined countries − Canada, US (North America), France, Germany, Italy (Europe ex-UK Core), UK and Japan, as well as satellite countries. The Fund is offered with the option to switch between $AUD hedged (to $USD), and $AUD unhedged, at no additional cost.

JCB Executive Director and CIO, Charlie Jamieson said: “Diversifying bond allocations to reach global markets can potentially enhance returns by adding a layer of currency risk. Investors with exposure to global high grade bonds ($USD) in 2018 would have achieved double digit returns on an unhedged basis, in a year of low to negative returns for most asset classes.”

“Recently, the AUD has been performing as a risk proxy against roughly 70% of emerging markets currencies and seems deeply intertwined with the performance of the Chinese economy, given Australia’s heavy reliance on China as a major trade partner.“ said Mr Jamieson.

JCB has been actively managing its global strategy since February 2018. Its investment process relies heavily on actively monitoring global markets and fundamentals, policy, politics and supply implications, to mitigate downside risk. The investment team holds significant combined experience in fixed income and currency management working for some the largest institutions in the world’s major financial centres, specialising in global government bonds.

JCB intends to build on its local team in Asia and its global investment capabilities, having hired Kate Samranvedhya in 2018 from the Hong Kong Monetary Authority, where she was a senior portfolio manager specialising in global bonds portfolios and country allocations. JCB currently manages A$2.45 billion of assets under management for both institutional and retail investors.

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According to Bloomberg, major global equity markets returned -6% to -25%, global aggregate credit -3%, global inflation-linked credit -4%, and global high yield -4%. Government bonds? US treasuries +0.9% and Australian Government bonds a healthy +5.1% return in 2018 – a perfect example of the defensive characteristics that high grade bonds provide in times of stress and heightened volatility.

Defying all precedent and using tools never before tested – the final quarter of 2018 showcases a world without Quantitative Easing and excess liquidity

JCB believes what investors are currently experiencing is historic and totally without precedent. Quantitative Easing (QE), a wonder drug for asset prices, has globally reversed to Quantitative Tightening (QT) and risk markets are taking exception to this. Having become grossly accustomed to the benefits of QE, risk markets are reacting with such vehemence, it is unpleasant to watch. The wonder drug of QE together with its somewhat depressive cousin QT have never been trialled before. Investors are collectively living this trial without a safety net not, knowing how this may end.

According to JCB there is one certainty, the technical damage inflicted on markets in the December 2018 quarter will have consequences for 2019. Post the intoxication of Trump’s ineffective tax cuts promising sustained growth, the resulting hangover is painful. As investors close the year, the entire Trump-fuelled tax cut equity rally is gone, as if it never happened. The promised growth is leaking away as housing and autos continue to decay under the burden of higher interest rates. Unfortunately, this hangover includes damage in the form of a trillion dollars of additional debt. From a technical perspective, markets have now reached material new highs and have experienced a colossal failure. Looking forward, JCB believes this doesn’t bode well.

Investors should get used to higher volatility ahead, as policy settings remain unfriendly

JCB considers 2019 will most likely be a highly volatile year and represents a year of regime change. Financial ecstasy has already flipped to anxiety so it is important for investors to be well prepared. Balanced portfolios should outperform and ‘defend and protect’ assets should ease the pain. There will likely be good opportunities inside powerful counter trend risk rallies. However, these are chances to re-position portfolios as the major theme of QT and higher rates makes for difficult times under policy settings designed to cool financial markets. Until those policy settings swing to a more favourable position (rate cuts and more QE) the theme remains negative with no or little support.

Bonds perform for portfolios with strong negative correlation to equity markets in the final quarter of 2018

JCB believes that the fourth quarter returns for fixed rate bonds has defeated any argument around asset market correlation under major stress periods. The performance of both domestic and international fixed rate bonds has been extremely powerful in contrast to many equity markets. No doubt the debate will continue, with plenty of debate from both sides. Despite all the noise, JCB rests in the knowledge that an allocation to domestic and international fixed rate bonds delivers defence and protection to investor portfolios, particularly in times of great volatility.

Reasons to be upbeat looking ahead

Whilst 2019 has its fair share of worries, there will also be excellent opportunities inside the macro environment. Domestically, JCB expects high levels of government spending ahead of the federal election, on areas such as infrastructure, which are needed to help stabilise an economy suffering from a property market correction.

Internationally, the U.S. Federal Reserve looks likely to be almost complete with their rate hiking cycle that has been well telegraphed and articulated with great transparency. Central bankers are acutely aware of the feedback loops that are created by their actions, so JCB expects this is about letting some air out of the tyres for an orderly and contained correction. Ultimately, if this asset deflation happens in an orderly way, it sets up the structures of the market in a far stronger period for the next acceleration of growth, whenever that may be.

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