RBA CUTS WITH MORE TO COME

Firstly, if you are reading this we welcome you to Jamieson Coote Bonds. We will attempt to keep these monthly’s short and relevant however we urge you to call us to discuss any of the following content in greater detail. There is a huge amount going on in macro space causing currents and cross currents for all asset markets.

2015 will remain an extremely volatile year. In January alone we have witnessed and explosive month for macro markets with the surprise removal of the Swiss Franc ( CHF) peg ( vs EUR) by the Swiss National Bank combined with a 50bps rate cut taking official cash rates in Switzerland to negative 0.75%, resulting in Swiss Government Bonds trading at negative yields. This shock move generated significant volatility in FX markets with CHF appreciating 35% on the day and highlights the impact Central Bankers are having on markets in distorting the allocation of capital and removing the free markets ability to set prices.

The ECB followed suite with a massive 1.1 trillion Euro’s of Quantitative Easing (buying Government Bonds with printed money) and stated they would include sovereign bonds with negative yields in the buying program. The evolution of negative yields on government bonds is extraordinary and removes the lower boundary valuation condition at 0%. Capital prices for bonds continue to increase as bond yields fall – even when negative. Trillions of dollars of Government bonds now trade with negative yields highlighting the vicious deflationary forces at play in much of the globe. Australian 10yr Government Bonds at yields of 2.50% look extremely attractive to the global investment community in this context.

Oil, commodity and energy markets remain in key focus. Corporates have reacted to lower oil prices pulling capex and slowing production, withdrawing oil rigs at fastest pace in recent history. We feel prices will stabilise for a period as supply is beginning to be constrained.

As a result of the macro forces at play, the RBA will be compelled to act by lowering the cash rate in coming months to sure up domestic demand and force the currency lower helping stabilise the economy. JCB retains its long held view that economic outlook for Australia remains extremely challenging with lower commodity prices and slower global growth.

Recent comments from equity market participants that equities have ‘’bond like’’ characteristics are absurd. Government Bonds carry the explicit guarantee of a nation and taxes can but levied on citizens to repay these obligations. Equities are the riskiest investment one can make and returns should compensate for the larger risks associated. There is absolutely ZERO guarantee of return of monies invested in the equity space. When the economy turns and credit cycle bursts, bad and doubtful debts rise dramatically. Dividends get cut and equity valuations plummet. We have experienced these unpleasant events first hand. Working for Merrill Lynch pre GFC I received stock at $100. It traded at $1 two years later. Lower interest rates are great for asset valuations while the world remains calm but the risk build up in the system is potentially explosive and fatal when the winds change.

FUND HIGHLIGHTS & POSITIONING

JAMIESON COOTE BONDS ENJOYED SOLID RETURNS THROUGHOUT JANUARY IN LINE WITH OUR MANDATE OF HIGH SINGLE DIGIT ANNUAL RETURNS WITH A STRICT FOCUS ON CAPITAL PRESERVATION.

The month was characterised by significant intervention in markets from Central Banks with Swiss National Bank unexpectedly removing its currency peg vs Euro and ECB embarking upon a larger than expected 1.1 trillion Euros of Quantitative Easing to fight deflationary forces in the Eurozone. With oil prices also declining significantly, deflation or disinflation was the subject of much discussion in markets and collapsed yield premiums across asset classes.

JCBAF was cautious for the opening part of January, given relatively illiquid markets at the beginning of the year and large macro-economic events on the calendar with binary outcomes. Prior to the ECB policy meeting, markets generated lively debate regarding the potential commencement of a QE program, and what would be the size, timing and guarantee structure of such an initiative. After the announcement of the larger than expected bond buying program from the ECB we increased duration and exposure of the portfolio in expectation of international investor demand for globally attractive long dated Australian Government Bonds.