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.

Charlie Jamieson

The trade war enters new prolonged phase as both sides escalate keeping macro data weak

President Trump’s announcement of additional tariffs imposed on Chinese goods early in August set the tone for a material flight to quality rally across global bond markets.  China responded by adding tariffs to US goods, continuing to operate in a ‘tit for tat’ exchange that will further prolong the trade war and depress global economic sentiment.  Seemingly a period of negotiation and compromise in the trade war has now ended and with these additional developments a likely acknowledgment from both sides that they are prepared to endure a protracted fight.

This is likely to further depress capital spending intentions, as companies struggle to identify which jurisdictions may be subject to tariffs when forward planning. Our central expectation remains that the trade war is a complex fight over not only trade, but technology and the control of artificial intelligence, a fight neither side can afford to lose.  Trump’s plans may well be to broker a deal ahead of his November 2020 re-election campaign to try and slingshot the US economy ahead of election day, but it was China who rolled on the first version of the deal in May at the 11th hour when it came down to changing Chinese domestic law and making the deal enforceable.

US Treasury curve deeply inverted signalling severe recession risk, with the US Federal Reserve (US Fed) funds now the highest interest rate in the developed world ex Italy

The US Treasury bond curve finally inverted in the month of August between the 10 year and 2 year Government Bond yields (i.e. 10 year Government Bonds now yield less than 2 year bonds).  Such previous episodes have historically had exceptional predictive ability at forecasting US recessions shortly thereafter with only one false negative in 1967. We actually favour monitoring the 3 month rate versus the 10 year bond rate, noting that this curve has been inverted since 23 May 2019.  We have written previously at length about the flattening term structure curve and why you would likely hear more about this in time.

At the time of writing, the rate of short-term funding in the US is higher than every bond of all maturities (long and short dated) in the G7, except for long dated Italian bonds, which are currently subject to significant political risk.  That is quite extraordinary given the hugely powerful signaling from global bond markets that future expected growth and inflation remains deeply depressed, whilst also suggesting that the US Fed is badly behind the curve and needs to cut rates aggressively to avoid recession.

Negative yielding bonds deliver best returns

As global central banks continue to experiment with negative interest rates, it’s ironic that some of the best performing bond markets this year have also been the most negative in yield.  This is a difficult notion to fathom, that a bond already delivering a slightly negative return, if held to maturity, can produce significant positive returns – Switzerland’s bond markets are the most negative and the year to date return is around +12.5%.  Negative yielding bonds have been around for more than 5 years now, ever since the European Central Bank and the Bank of Japan took their policy rates below zero. An extension of those negative interest rate policies coupled with depressed inflation expectations is redefining investors’ expectations of the performance of fixed income as an asset class. Thankfully, Australia looks some way off needing to embark on any such negative interest rate policy, but the actions of others continue to make Australian Government Bonds highly desirable on a global scale given their excellent liquidity and highest AAA rating.

RBA Governor Lowe suggests flexibility in inflation outcomes at Jackson Hole, suggesting a pause in rate cuts for domestic only reasoning.  JCB still expects additional rate cuts from global factors

We have long argued that the RBA would cut rates from 1.50% to 1.00% on domestic factors, and then additionally cut rates from 1.00% to 0.50% due to global factors.   They expect those additional rate cuts either very late this year or in the early part of 2020.  We found a recent speech from RBA Governor Lowe at Jackson Hole (a Central Banking conference in Wyoming USA) of interest as he suggested the RBA may use ‘flexibility’ in judging its inflation outcomes. We see this as allowing for a pause in the interest rate cutting cycle as expected, where the RBA will not be wedded to below target inflation to further cut the policy rate.

We expect the RBA to remain firmly focused on achieving full capacity in the economy, in line with additional reductions in the unemployment rate below 4.50% (currently 5.20%) as telegraphed by the RBA’s Lucy Ellis earlier this year.

By Charlie Jamieson

]]>

Charlie Jamieson

The trade war enters new prolonged phase as both sides escalate keeping macro data weak

President Trump’s announcement of additional tariffs imposed on Chinese goods early in August set the tone for a material flight to quality rally across global bond markets.  China responded by adding tariffs to US goods, continuing to operate in a ‘tit for tat’ exchange that will further prolong the trade war and depress global economic sentiment.  Seemingly a period of negotiation and compromise in the trade war has now ended and with these additional developments a likely acknowledgment from both sides that they are prepared to endure a protracted fight.

This is likely to further depress capital spending intentions, as companies struggle to identify which jurisdictions may be subject to tariffs when forward planning. Our central expectation remains that the trade war is a complex fight over not only trade, but technology and the control of artificial intelligence, a fight neither side can afford to lose.  Trump’s plans may well be to broker a deal ahead of his November 2020 re-election campaign to try and slingshot the US economy ahead of election day, but it was China who rolled on the first version of the deal in May at the 11th hour when it came down to changing Chinese domestic law and making the deal enforceable.

US Treasury curve deeply inverted signalling severe recession risk, with the US Federal Reserve (US Fed) funds now the highest interest rate in the developed world ex Italy

The US Treasury bond curve finally inverted in the month of August between the 10 year and 2 year Government Bond yields (i.e. 10 year Government Bonds now yield less than 2 year bonds).  Such previous episodes have historically had exceptional predictive ability at forecasting US recessions shortly thereafter with only one false negative in 1967. We actually favour monitoring the 3 month rate versus the 10 year bond rate, noting that this curve has been inverted since 23 May 2019.  We have written previously at length about the flattening term structure curve and why you would likely hear more about this in time.

At the time of writing, the rate of short-term funding in the US is higher than every bond of all maturities (long and short dated) in the G7, except for long dated Italian bonds, which are currently subject to significant political risk.  That is quite extraordinary given the hugely powerful signaling from global bond markets that future expected growth and inflation remains deeply depressed, whilst also suggesting that the US Fed is badly behind the curve and needs to cut rates aggressively to avoid recession.

Negative yielding bonds deliver best returns

As global central banks continue to experiment with negative interest rates, it’s ironic that some of the best performing bond markets this year have also been the most negative in yield.  This is a difficult notion to fathom, that a bond already delivering a slightly negative return, if held to maturity, can produce significant positive returns – Switzerland’s bond markets are the most negative and the year to date return is around +12.5%.  Negative yielding bonds have been around for more than 5 years now, ever since the European Central Bank and the Bank of Japan took their policy rates below zero. An extension of those negative interest rate policies coupled with depressed inflation expectations is redefining investors’ expectations of the performance of fixed income as an asset class. Thankfully, Australia looks some way off needing to embark on any such negative interest rate policy, but the actions of others continue to make Australian Government Bonds highly desirable on a global scale given their excellent liquidity and highest AAA rating.

RBA Governor Lowe suggests flexibility in inflation outcomes at Jackson Hole, suggesting a pause in rate cuts for domestic only reasoning.  JCB still expects additional rate cuts from global factors

We have long argued that the RBA would cut rates from 1.50% to 1.00% on domestic factors, and then additionally cut rates from 1.00% to 0.50% due to global factors.   They expect those additional rate cuts either very late this year or in the early part of 2020.  We found a recent speech from RBA Governor Lowe at Jackson Hole (a Central Banking conference in Wyoming USA) of interest as he suggested the RBA may use ‘flexibility’ in judging its inflation outcomes. We see this as allowing for a pause in the interest rate cutting cycle as expected, where the RBA will not be wedded to below target inflation to further cut the policy rate.

We expect the RBA to remain firmly focused on achieving full capacity in the economy, in line with additional reductions in the unemployment rate below 4.50% (currently 5.20%) as telegraphed by the RBA’s Lucy Ellis earlier this year.

By Charlie Jamieson

The post Can negative yielding bonds deliver positive returns? appeared first on AdviserVoice.

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

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.

Kate Samranvedhya

Jamieson Coote Bonds (JCB), specialist high grade bond manager, has hired ex Hong Kong Monetary Authority portfolio manager, Duangjai (Kate) Samranvedhya as its new Deputy Chief Investment Officer.

Kate will provide input into the management of the domestic high grade bond strategy as well as manage JCB’s global strategy.

JCB Executive Director and Chief Investment Officer, Charlie Jamieson said: “We are delighted to have Kate on board at a time where investors are demanding highly skilled managers who can generate defensive returns, both in domestic and global markets. Kate’s significant experience and skill in managing high grade bonds will only add greater depth to our team and process. We have reached a size now where we can expand our presence, and with Kate on board, have opened an office in Singapore where we intend to build on our local team in Asia.”

Since 2000, Kate has been a career portfolio manager and investment specialist with two large Central Banks in Asia. She specialises in foreign reserve and high grade bond portfolio management across all major global regions.

Commenting on the appointment, Deputy Chief Investment Officer Kate Samranvedhya said “I’m tremendously excited to join JCB. I’ve known Charlie Jamieson and Angus Coote (the founders) for a long time and I share their vision of offering high-quality, highly liquid duration investment strategies to the Australian market. My expertise in managing very large sovereign portfolios across global markets will compliment and add value to the JCB team. We aim to be best in class when people look for a rates and duration fund manager.”

Kate began her career at the Bank of Thailand, the central bank, in investment risk management, and pioneered a balance sheet risk management approach linked to how a central bank conducts its monetary policy and the impact to its balance sheet. From 2007, Kate transitioned into portfolio management, focusing on high grade bonds and managed fixed income portfolios through the GFC. In 2010, she moved to Hong Kong to join the Hong Kong Monetary Authority as a portfolio manager, specialising in rates and cross-country bond allocation.

JCB intends to build on its local team in Asia and its global investment capabilities. JCB currently manages A$1.3 billion of assets for both institutional and retail investors.

The tightening of bank lending on investment properties is having a significant ripple effect through the Australian apartment markets.

The US Federal Reserve hit the brakes for first time in 13 years, policy is now economically ‘restrictive’

The US Federal Reserve (the Fed) lifted interest rates to 2.25% as was widely expected in September and commented that monetary policy is no longer ‘accommodative’. Previous rate hikes have merely lifted their foot from the accelerator, but moving from ‘accommodative’ to ‘restrictive’ is a significant moment in the development of the economic cycle, as the Fed is now actively trying to jam on the brakes. With interest rates rising and funding liquidity difficulties mounting, pressure is building on debtors. Historically this leads to recession as corporate/personal debt bubbles burst and financial defaults ensue. There is nothing in this set up that makes JCB believe this time will be any different. Looking at US interest rate moves over the past 75 years, a rise in interest rates has had a significant effect on risk assets. Since the Brexit lows, US Treasury bond yields have risen ~120% versus a cycle average of ~44%. Corresponding moves in US S&P equity indices after such moves have been negative (unsurprisingly as financial conditions tighten) with a mean drawdown of -20.2%.

US interest rates are rising and the Fed is intent on jamming on the brakes. JCB believes the asset allocation implications are likely to be vast.

The party has come to an abrupt halt for Australian property thanks to the Royal Commission and domestic credit availability

When you ’grow’ with debt, times feel good. Loans are made, capital is deployed, asset prices rise, interest is paid and everyone is happy. Until someone later in the cycle is denied a loan, at which point that ‘growth’ can flip to unsustainable debt loads very quickly.

The Hayne Banking Royal Commission will likely be viewed in history as the tipping point for Australian financial asset and property performance. After a long period of easy credit availability globally, coupled with weak domestic loan due diligence and generous loan to valuation ratios, it seems the party has come to an abrupt halt for Australian property, with significant implications for Australian banks who are highly leveraged into property lending as their main source of income and profit growth. Other factors are also at play with APRA tightening its policies and global funding costs rising.

Property settlement failures could trigger dreaded forced selling; the seat belt sign is on

Ordinarily, to have a collapsing marketplace you would need ‘forced selling’, people who must transact regardless of economics. In a recession or high unemployment period these unfortunate folks are easy to identify, but in a silent correction – such as we are currently experiencing in Australian property – identifying the forced seller is much harder.

The tightening of bank lending on investment properties is having a significant ripple effect through the Australian apartment markets. ‘Off the plan’ buyers are failing to settle in droves on completion of their purchased apartments due to the lack of banking finance.

Some estimates of completed apartment projects unable to settle in Brisbane, Sydney and Melbourne are running as high as 40-50%. Failing to settle a legally binding contract is no small problem, placing leveraged developers under financial strain who in turn are potentially forced to flip their newly finished stock into a falling market to satisfy their own loan agreements. The obvious chain of events from here could create a wave of forced sellers into a market that is only just beginning to correct after a period of vast outperformance.

The developers have a contractual right to sue the buyer for the difference between the assets realisation (plus legal costs) and contract price.

Should the purchaser not hold sufficient liquidity to fund such a cash settlement, they would be forced to sell assets. It shouldn’t take much of a correction for banks to revalue an investment property portfolio to the downside and materially tighten loan conditions or required additional capital calls. Buckle up, JCB believes there could be turbulence on the radar ahead.

AUD enjoys counter trend bounce, still bearish for now

The Australian dollar (AUD) enjoyed a brief counter trend bounce in September trading above 73 cents (versus the USD), before pulling back again into a negative trend. Ultimately, a mild fall in the AUD will help stabilise the economic fallout from the change of government combined with pockets of housing stress.

JCB maintains that 2018 is the ‘year of the USD’ as the US enjoys the last throes of highly ‘pro-growth at any cost’ policies. As economic growth declines into 2019 and with Trump’s fiscal expansion moderating, the AUD currency will likely break its clean downward trend.

By Charlie Jamieson, Portfolio Manager and CIO