LONDON (Reuters) - The Bank of England’s decision to raise interest rates was a correct move and policymakers may raise them a couple of times next year, a top JP Morgan Asset Management executive said on Tuesday.
Nick Gartside, the fund firm’s international chief investment officer for fixed income, currency and commodities, said risks to economic growth in Britain are tilted to the upside given global growth. So the firm has taken a “modestly long” sterling position.
“On gilts we have no particular position because of valuations but on sterling we are long and we tactically started that position about three to four weeks ago,” Gartside who also co-manages their multi-sector fixed income products told Reuters’ 2018 Global Investment Summit.
Sterling has taken a beating since the Bank of England’s decision to raise interest rates earlier this month, falling nearly 2 percent as markets have ramped up their bets that interest rates will rise only twice over the next three years.
Gartside expects the U.S. yield curve to flatten more in the coming months and could “get really close to zero next year” as higher interest rates push up the shorter end of the curve while low inflation continues to pressure longer term interest rates lower but that is unlikely a recession indicator.
JP Morgan Asset Management expects the U.S. central bank to raise interest rates three times next year.
Despite last week’s outflows from high yield debt and a widening in spreads, Gartside remained upbeat on the outlook for both U.S. and European high yield debt due to an improving global economy which has increased the likelihood of more upgrades than downgrades in ratings.
More ratings upgrades also trigger a change in the composition of the underlying high yield bond index as more lower-yielding but lower-rated bonds are upgraded leaving behind a basket of higher-yielding but lower-quality debt.
“Over the next 6 to 9 months it could shrink by as much as 10 percent,” Gartside who has had stints with Schroders, Mercury Asset Management before joining JPMorgan Asset Management in 2010 said.
(For a graphic on U.S., European High Yield click reut.rs/2zzMYD7)Gartside said yields on junk bonds rise because of two main factors, namely the prospects of recession and when companies start to undertake debt to do a lot of equity-friendly activity such as finance transactions and pay dividends, both of which are unlikely in the European scenario.
Yields on Bank of America Merrill Lynch’s high yield bond indexes for both European and U.S. high yield debt has risen by 25-30 basis points so far this month with funds facing outflows.
“If you are a corporate treasurer in Europe then the memory of the crisis is a very recent and raw memory and levels of leverage are generally sensible,” he said.
JP Morgan AM is also bullish on Italian bonds because the underlying economic fundamentals are improving as evident from a recent upgrade by ratings agency S&P, its first in more than two decades and underlying structural strengths such as a current account surplus.
“Growth in Italy is not going to be super strong but the direction has shifted and turned and we’d argue that’s the real story,” Gartside said.
(For a graphic on German-Italian bond yields click reut.rs/2zY2Joe)
* Overweight emerging market local debt funded by a basket of developed market currencies including the dollar and the euro compared to only using the greenback earlier.
* Overweight Turkey and South Africa local debt.
* No place for cryptocurrencies in investment portfolios.
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Reporting by Saikat Chatterjee Additional reporting by Sujata Rao; Editing by Jeremy Gaunt