JCB ACTIVE FUND IS A PORTFOLIO OF LONG ONLY AAA AND AA+ RATED EXPLICITLY GUARANTEED GOVERNMENT BONDS. SINCE INCEPTION ANNUALIZED RETURNS ARE CURRENTLY 7.17% NET OF ALL FEE’S.

• MARKING TIME BEFORE VOLATILITY AS MARKETS RETURN FROM THE SUN-LOUNGER
• FOMC SHOULD HIKE IN SEPTEMBER BUT WILL WAIT UNTIL POST US ELECTION DECEMBER
• $AUD LIKE A BEACH BALL UNDER WATER. CRITICAL LEVELS 0.7390 VS 0.7720

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” - Mark Twain

After the BREXIT excitement of late June, markets have been very dull over the balance of the Northern Hemisphere summer. Central Banks have had our collective backs, providing more cheap money, whilst major news flow has been light. Financial market volatility has dropped 55% over the last 10 weeks – the largest 10 week decline ever! Northern Hemisphere summer is now over and people are dragging themselves back to work after an extended rest on the sun-loungers. We expect market participation to pick up, challenging the status quo of the tame July and August months. Of late, rhetoric from the Federal Reserve has turned hawkish (sympathy to a rate hike). Financial conditions in the US they are as favourable as we have seen for some time:

• Equity valuations are high;
• the USD currency index currently mid-range on the year;
• corporate credit spreads have tightened;
• bond yields are low; and,
• consumer confidence is high.

If we didn’t consider the implications of a US election in November, we would absolutely argue that the FOMC would hike rates immediately. Ordinarily, however, the FOMC doesn’t move during the presidential cycle and a rate hike would be considered damaging for markets, hurting the Clinton campaign. Yellen is a democrat, and we have seen commentators like Barney Frank add weight to the debate that the FOMC shouldn’t interfere with the election cycle by upsetting the apple cart. We believe that FOMC credibility is at stake, with a possible September hike being a very close call. The market and economic conditions are there to justify a single rate hike – does politics interfere and hope the winds don’t change come December?

A Clinton presidential victory, combined with a split Congress and Senate is NIRVANA for financial asset prices. Nothing can be achieved on the fiscal side in this scenario so the FOMC will be forced to keep rates low and provide significant liquidity over the presidential term, which will boost financial asset prices. This remains the central expectation of markets. We note recent Economist and CNN polls showing Trump and Clinton neck-and-neck. Trump has done everything wrong and the Democrats arguably everything right, and yet the polls are narrowing. That is truly scary. BREXIT has highlighted the dangers of ‘knowing for sure’ that Trump cannot win. We continue to monitor this space very closely into the November elections.

The outcome of the FOMC meeting on September 21st will drive near-term expectations for the AUD currency. Technically the currency is coiling, meaning when the narrowing range is broken, we would expect a substantial follow through. The major levels to watch are 0.7390 (this is trend line support and 200 day moving average) to the down side and 0.7720 to the top side being the trend line in place since April 2013 when AUD was $1.0500. At this stage we still believe the AUD will break higher through 0.7750 area to test 80 cents. Despite strong domestic opinion that the AUD currency remains overvalued, the currency has managed to rally 11% since its January lows, despite two RBA rate cuts, which begs the question where the currency would currently be if RBA hadn’t cut rates this year? We still maintain that AUD bonds are broadly range-bound in the short term, regardless of a single FOMC rate move. We continue to position the portfolio tactically around this opportunity set, and believe the RBA will be forced to cut rates again in early 2017 due to unwanted AUD currency strength.

Fund update

JCB Active Fund returned 44 bps (gross) in August, beating the index by 10 bps. Whilst markets remain calm we have maintained a higher weighting to State Government Bonds and Supra Nationals Bonds, looking to earn additional carry income. Should volatility rise into September, we will review these allocations going forward and may reverse. We maintain an overweight to the long-end (20 year) of the Australian bond curve, hedging with some steepening in shorter dates to balance the curve risk. We would add to this position into any cheapening via a supply concession should the AOFM issue a new 25- year bond in October (as expected).