Volatility: Matter of time before the fundamentals re-assert themselves – Fidelity
|Ian Spreadbury, Portfolio Manager of the Fidelity Strategic Bond Fund, shares his views on the reasons for recent volatility and what it all means for investors:
Key Quotes
“We have seen more volatility in the past month or so than recent months combined. For example, the 10 year UK Gilt yield came within touching distance of 50 basis points midway through August, but has since backed up to around 1 per cent. Recent moves in rates seem to have been driven by a mix of things, including Japan's yield curve control announcement, the Fed's attempts to telegraph their next move, QE tapering talk and question marks over the ability of the ECB and Bank of England to ease further from here.
“Sterling has also suffered further slides, which is no doubt attributable to the reality of 'Brexit' setting in. Despite the strong technical backdrop, credit spread tightening has come to a temporary halt and the latest Deutsche Bank debacle suggests that nervousness extends beyond rates into credit markets. Compounded by the uncertainty surrounding the US presidential election, the UK Autumn Statement and the Italian constitutional referendum, investor concerns are unlikely to fade anytime soon.
So what’s changed?
“The Bank of Japan has missed its inflation targets for twenty years, which leads us to question if their latest policy iteration is going to be any different,” Spreadbury continues. “However, yield curve targeting effectively puts a cap on yields and could well pave the way for more radical policy steps in the future (such as helicopter money). There is no doubt in our mind that central banks can create inflation if they are aggressive enough, but they are well aware that it can be incredibly difficult to control when it gets going. An increased focus on UK inflation is inevitable given the fall in the currency, but we continue to think the inflationary impacts will be transitory.
“Talk of a shift in the UK's focus from monetary policy to more expansionary fiscal policy has intensified of late, alongside speculation about potential 'tapering' from the ECB. We think it is extremely unlikely the authorities will take stimulus away and steepen yield curves at this stage. It is simply not in the central banks' interests to create disorder in the fixed income markets – especially given the other headwinds in play.
“We believe it is only a matter of time before the fundamentals re-assert themselves. High debt, elevated political risk, low nominal growth and low inflation will continue to characterise the fundamental backdrop in our view. This will warrant a protracted normalisation process and low yield regime for the foreseeable future.”
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