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Our views 07 February 2020

New year, old problems

By Craig Inches, Head of Rates and Cash

5 min read

A version of this article first appeared in Investment Week on 6 February 2020.

For time immemorial the start of the year has been a period for fresh gazing into the future, for pondering the changes that the year ahead might bring. For government bond investors this year, however, it is remarkable how similar the issues on the horizon look to those they might have mentioned at the start of last year, even if there have been signs of progress.

Heading into 2019, one of the main concerns for investors was the state of US-China trade talks. Despite some reassuring rhetoric there were grave uncertainties about the future talks given the political leaders involved. That description reasonably summarises today’s situation, in which the positive rhetoric betrays the huge amount of work left to do.

China will be travelling to the US next week to sign a ‘phase one’ trade deal on 15 January. It will involve, among other things, the suspension of planned US tariffs on $156bn of Chinese consumer goods and the halving of 15% tariffs on $120bn of imports introduced in September. As positive as that sounds, it only takes tariffs back to the levels they were last May, and there is a long way to go in ‘phase two’.

Brexit is another obvious matter that remains at the forefront of minds. Despite the Conservative Party gaining a substantial majority in December’s election, ending the UK parliamentary stalemate, the one-year deadline which Prime Minister Boris Johnson has imposed on the trade negotiations leaves the threat of the UK leaving the EU without a trade deal as real as ever.

We have even seen the return of quantitative easing as central banks struggled to fire up a weakening global economy and stoke inflation. Despite the appearance of new governors at the European Central Bank and the Bank of England, who may be eager to make impressions, the banks are likely to be constrained by the limited evidence of any pick-up in growth or inflation.

There are also a few new issues that have entered the fray. The year started with a bang with the killing of General Qassem Soleimani sparking a tense confrontation between the US and Iran. The US Presidential election is also heating up, with radically different policy stances among the prominent candidates. Elsewhere, fiscal stimulus has become a major global theme in light of the calming of monetary policymaking.

In our opinion the longstanding uncertainties and heightened volatility are here to stay and we fully expect the best opportunities in 2020 to be tactical rather than strategic. Our unique selling point is our embrace of arbitrage events synonymous with market volatility, and although we don’t profess to have perfect foresight…in the land of the blind the one-eyed man is king!

Past performance is not a reliable indicator of future results. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice. Portfolio holdings are subject to change, for information only and are not investment recommendations.