Historical monthly market and fund updates

2017

• 2016

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  MARKET UPDATE JANUARY 2016

   

  JCB Active Fund is up 7.20 % (gross) over 14 months since inception in December 2014, running a portfolio of long only AAA and AA+ rated Government Bonds.

   

  Markets in 2016 have caught everyone by surprise with vicious negative sentiment and volatility. Energy markets and Chinese currency depreciation are often blamed, but I think we can add the strength of the US dollar to the list of causes. JCB has written at length over the last 6 months about the US Federal Reserve attempting to hike rates and the flow on effects that a series of hikes would unleash. We suggested that the Fed wouldn’t get very far before markets would suffer and force them to firstly pause on any further rate hikes, and then ultimately reverse course. That will be good news for equity markets when it comes, but unfortunately we are not there yet. Did we all see this movie before? This is exactly what happened to the European Central Bank in 2011 when they hiked rates. Similar to the Fed move in Dec ’15, the market initially took the ECB at its word that the economy would improve, and made room in bond markets for further hikes, before it became clearly evident that the hike was a policy error which would require reversal inside a fragile economy. US data has decayed considerably over January after last year’s rate hike, with manufacturing sector entering recession. US dollar strength, the equity sell off and widening of credit spreads (the cost of corporate borrowing) together imply financial conditions have tightened substantially. Deutsche Bank has an augmented Fed recession model which now predicts a 46 percent chance of a US recession in next 12 months. This elevated reading is consistent with the recent increase in cumulative deflation probability implied by options markets.

   

  The US Federal Reserve statement in January removed the word ‘balanced’ when discussing the outlook for risks. This is either a slight oversight (unlikely) or something we should all be discussing at length - let’s hope it is an oversight for all our sakes. There has only been one other time they could not offer a ‘balance’ of risks and that was in the meeting of 18th March 2003, the day before President Bush declared war on Iraq, sending 250,000 soldiers into the Middle East. Every other statement in the last 15 years has held a ’balance of risks.’ Is the Fed saying the current environment is as uncertain as the 24 hours before America walked into a major war? Even in September 2008, when the Fed had a FOMC meeting two days after Lehman failed and Secretary of the Treasury Geithner had to miss the meeting because he was busy arranging a bailout of AIG, the Fed was able to offer a ‘balance of risks.’ But again, they could not offer this in January! Did the Fed just say that looking forward risk is a one sided trade? We wrote about our views of asymmetry in asset markets in 2016 last month but we didn’t expect the Fed to openly acknowledge these risks in such a way. Central Bankers are always glass half full – they have to be to build confidence. We will follow these developments with great interest on February 10th when Chair Janet Yellen speaks publicly for the first time since the January meeting and statement.

   

  The Bank of Japan joined the negative interest rate experiment on the last day of January in a surprise to markets. They now sit alongside the European Central Bank, Switzerland, Sweden and Denmark in forcing official interest rates into negative territory to drive currency depreciation and force investors into risky assets and stimulate inflation. We live in truly amazing times when much of the developed world now openly accepts negative interest rates.

   

  Japan is a fascinating case study for developed financial markets. This move is the latest attempt to reflate and stimulate the economy which peaked 25 years ago on a wave of credit creation. Today’s global love affair with credit started in Japan in the 1980’s. In very simplistic terms once the Japanese boom turned to bust, that credit bubble moved into South East Asia culminating in the Asian financial and Russian crisis in 1990’s, then moved to North Atlantic to manifest in US subprime. Has that credit boom/bust cycle moved onto China? That is all beyond the scope of this update but we are happy to discuss this in longer format if any readers wish to explore it further, as the implication for Australia would be profound.

   

  Today the Nikkei remains 54% below its all-time high. Imagine the ASX at 3100 in the year 2032? Japan is a shocking example that a credit boom to bust, combined with bad policy errors and poor demographics can have a generational impact on asset returns. That is worth considering as Australia’s markets continue to transition away from a significant period of boom and we have a minority senate blocking real economic reform. This stimulus of negative rates in Japan is welcome by global markets in the short run, lifting all assets classes in unison. It also strengthens the case for an RBA rate cut later in 2016 and makes Australian Bonds cheaper on a global relative value basis.

   

  After a fascinating and fast forward start to 2016 we will continue to monitor the evolution of US Fed policy, Chinese foreign exchange policy, energy markets and their effect on inflation (or deflation) expectations, the Eurozone migration crisis, the Greek debt crisis (Act IV in the Greek financial tragedy) and the continued rise of Donald Trump versus the decline of power hungry (but oil dependant) leaders such as Putin and co. We will also watch China’s Jinping try to manage a soft landing through transition. RBA policy all seems a somewhat bland verses that list but all of the above will lead markets soon enough.

   

  FUND HIGHLIGHTS & POSITIONING

   

  Jamieson Coote Bonds Active Fund gained 1.39% in January, under performing the market by 0.06%. The funds unit priced dropped by 1.05% after paying a semiannual distribution of 1% of Net Asset Value at 31st Dec 2015.

   

  In keeping with our core capital preservation objective we positioned the portfolio cautiously over the Christmas and New Year period, lowering fund duration and setting up for maximum roll and carry over the holiday break. The speed of the bond market rally caught us (and market) on the back foot and we returned to work early, adding risk to capture the market volatility. Over the month the fund held an average duration position of 4.21 years which should have resulted in material underperformance, given the benchmark’s larger weighting at 5.80 years duration, but volatility provided some excellent opportunities to adjust duration over the month. The fund has some flattening exposure, as the lower for longer thematic continues in the face of lower energy prices, however we will look to add some steepening exposure in time if valuations improve (curve flattens), as we expect the RBA will be forced to reconsider their ‘’chill out’’ manta into a strengthening AUD currency on a trade weighted basis.

  MARKET UPDATE FEBRUARY 2016

   

  JCB Active Fund is up 8.54 % (gross) over 15 months since inception in December 2014, running a portfolio of long only AAA and AA+ rated Government Bonds.

   

  NEGATIVE RATES SEE AUD SET TO RALLY, BANK FUNDING TO CAUSE OUT OF CYCLE RATE HIKES, RBA FORCED TO ACT

   

  Europe, Japan, Switzerland, Sweden and Denmark are all very real and developed places. They also all have negative interest rates. This trend is both powerful and global. This is not happening in Timbuktu, this is happening in Paris, Tokyo, Zurich and Stockholm. Negative interest rates are Central Bankers new tool in fighting anaemic growth and low inflation. You should not dismiss them. They have vast consequences for market valuations and discount rate assumptions. Those who dismissed Quantitative Easing (QE) 10 years ago failed to grasp the huge implications QE would have on markets and financial asset returns to their peril.

   

  Under negative interest rates, domestic banks are charged by their Central Banks to keep funds on deposit. The idea is to penalise banks for holding cash which could be lent into the economy to encourage investment and consumption. This results in much of these domestic bond markets trading at negative yields, depending on the bonds maturity. Investors in these regions are now forced to accept negative returns on their bond portfolios or find alternate sources of yield. Australia stands out like a shining light. AAA rated, a $700bln deep and liquid government bond market, Westminster legal system, and most importantly a Central Bank with ammunition to continue to cut rates. Here is where this becomes self-reinforcing. As international buyers purchase Australian Bonds, they need to buy AUD currency to settle the trades. This is part of the reason the AUD climbed so high after the GFC. Not only were investors importing capital to fund mining capex, but they were also buying Australia’s newly minted budget deficits at around $50 billion a year, which required purchasing AUD to settle the transactions.

   

  This new development coincides with skyrocketing bank funding costs. Around 30% of bank funding is sourced in international markets, where spreads have widened significantly as credit markets continue to suffer, resulting in higher borrowing costs for the banks. Do you expect the bank to absorb these higher costs? The 3rd certainty of life, after death and taxes, is that banks will pass these costs onto customers to maintain margins (also be wary of highly complex bank products promising great things, think CDO’s – classic end of cycle trick). Westpac already raised business loan rates last week and we would expect mortgage books will be next for out of cycle rate hikes.

   

  This tightening in financial conditions, along with a higher AUD, will be unwelcome with the RBA, who will be forced to cut rates in response. A rate cut will attempt to help Mum’s and Dad’s from higher mortgage rates at a time when the economy is quite fragile, although banks

   

  will not pass this cut through in full, rather restoring their net interest margins. A rate cut also removes the yield from Australian Government Bonds (resulting in significantly higher bond prices in the process), thereby reducing the pressure on the AUD currency, allowing the economy to rebalance and resort better conditions for future growth.

   

  Turning quickly to international events the rise of Donald Trump looks look to be gaining momentum. Markets hate uncertainty and in Trump they will get plenty. One of his first orders of business is to fire Janet Yellen as FOMC Chair. Combine this with Trump’s finger on the nuclear trigger and we could be in for quite a volatile ride!

   

  JCB also believe the European migration crisis can be the theme of the year for markets. Desperate people will be forced out of Syria via Turkey and into Greece at a time when Greece is again running out of money and incapable of processing them in a secure manner. We unfortunately expect more flash points of terror and violence like Paris, Cologne and Calais when the weather improves and more people attempt the journey. This can divide the European left and right and strain the Eurozone project considerably. It will also have a large impact on the BREXIT referendum of June 23rd

  MARKET UPDATE MARCH 2016

   

  JCB Active Fund is up 8.18 % (gross) over 16 months since inception in December 2014, running a portfolio of long only AAA and AA+ rated Government Bonds.

   

  CENTRAL BLACK MAGIC, POLICY DRIVEN MARKETS DON’T CARE ABOUT FUNDAMENTALS, BAD AND DOUBTFUL DEBTS

   

  A few waves of the dovish wand from Ms Yellen and some increasingly negative interest rates in Europe and just like that markets are saved again. It is hard to deny the power of Central Bankers acting collectively. We are without doubt in a POLICY driven environment that can trump fundamentals in the short term.

   

  Over much of 2015 we wrote about the need for a weaker USD and why Yellen would ultimately roll over and be supportive of markets, both fixed income bonds and equities. (Available on JCB website under ‘’Historical monthly markets and fund updates’’) The March FOMC press conference was extremely dovish, well beyond market expectations. Concerns over emerging markets and Chinese growth dominated and have global central bankers remaining on high alert.

   

  As much as these favourable policy developments are healthy for risk markets, they are unhealthy for Australia via the immense pressure they place on the AUD currency. A weakening USD via Ms Yellen only adds more fuel to the currency fire. We believe the AUD will continue to rally until the RBA resume cutting interest rates (as early as May – although this may not halt its ascent much but will help slow things down). Structural demand for AUD assets remains from international investors who remains buyers of AUD to settle Australian bond purchases. Think about these global interest rate levels. Switzerland -0.75%, Sweden -0.50%, Europe -0.40%, Japan -0.10%, USA 0.375%, Canada 0.50%, UK 0.50% and Australia 2.00%. These rate differentials were the topic of last month’s update and outlook and until the RBA significantly cut rates this will continue.

   

  Increased provisioning of Bad and Doubtful Debts in March saw much of the euphoric rally in Australian Bank equities powerfully reverse. One sell side analyst noted that bad and doubtful debt provisioning is like cockroaches, they are rarely found in isolation. Credit cycles are slow moving beasts and a turn negative in Australia is cause for real concern, given the heavily indebted nature of Australian consumers and bank loan book exposures. If we follow the international playbook here we would expect significant interest rate cuts which would be highly supportive for bond markets.

   

  We are saddened to write about terror this month after events in Brussels after forecasting it in these pages last month. This will keep happening, the European migration crisis can still become the theme of the year as associated terrorist actions polarises opinion around the morality of accepting despite people in need. The flow of human traffic out of Syria via Turkey and into Greece comes at a time when Greece is again running out of money and incapable of processing them in a secure manner. We will have more flash points in coming months and it will dominate the European left and right and strain the Eurozone project considerably. It will also have a large impact on the BREXIT referendum of June 23rd and the US presidential election.

  MARKET UPDATE APRIL 2016

   

  JCB Active Fund is up 8.55 % (gross) over 17 months since inception in December 2014, running a portfolio of long only AAA and AA+ rated explicitly guaranteed Government Bonds.

   

  SPECIAL RBA UPDATE - EXPECT FURTHER RATE CUTS ON WEAK INFLATION, $AUD RALLY IS OVER

   

  Australia’s financial future changed significantly with the onset of deflation in April. The quarter on quarter print of -0.2% and year on year just 1.3% were shockingly low. The speed of decay in the inflation data forces the RBA’s hand to meet its inflation mandate of 2-3%. A failure to address this deflationary episode runs the risk of needing to cut rates much further and faster at a later date, hence our conviction the RBA will act in May and again soon after (probably August), as 50 bps rate cut (delivered in 2 x 25bps) is the path of least regret. We believe the RBA will cut to 1.50% before pausing to access the impact on inflation. This is consistent with our thinking on Australian interest rates for some time and will come as no surprise to anyone who has followed our fund.

   

  JCB has written extensively about negative rates and their impact on driving the AUD currency higher via international bond investors coming to buy AUD assets. This currency rally from late January caught many investors off side. After the CPI data the topside of an AUD rally is now entirely negated. We expect the AUD to resume its bear trend towards 0.7260 (200 day moving average) and possibly beyond towards 0.70 cents as the RBA is forced to cut rates.

   

  FX markets traded around 0.77 ahead of May RBA meeting. Market expectations were 50/50 on a rate cut of 25 bps, with expected pricing for RBA cash rates over the year (RBA Run ahead of May meeting: May 1.87 Jun 1.815 Jul 1.785 Aug 1.71 Sep 1.70 Oct 1.69 Nov 1.66 Dec 1.65). This suggests that FX had already priced in ~1.4 rate cuts by Dec year end, given their expectation of RBA cash at 1.65% being one full cut to 1.75% and 40% of a further 25 bps cut being another 0.10% to 1.65%. This means that in an efficient FX market, the RBA will be required to cut TWICE or more in 2016 to move the currency lower than current pricing of 0.77.

   

  Over April risk markets continued to enjoy the policy support of central bankers. Further expectations for US Federal Reserve rate hikes remain muted, with the only a possible hike being in December (58% probability) after the Presidential elections. JCB commented over 2015 about the FOMC and how media expectations of 6 to 8 rate hikes would not materialise. Markets continue to re rate their FOMC expectations, whilst we are not forecasting material or multiple further rate hikes in the US, another small uptick of 0.25 bps is possible in the next 12 months.

   

  Should investors ‘’Sell in May, buy bonds and go away’’? Whilst we have concerns about macro events coming up, well diversified portfolios will continue to perform in all scenarios. If you don’t have a balance of growth, income, defensives and liquidity then you could be in for a bumpy ride. Northern hemisphere summer trading periods have produced significant volatility lately, and there is plenty to worry about and monitor again this year.

   

  Corporate earnings viewed via EBITDA continue to broadly decline, with many companies reporting that whilst beating low earnings expectations, period over period results have decayed leaving valuations stretched. However, as we noted in our last monthly, in periods of high policy intervention, episodes such as high valuations can go on for some time as policy trumps fundamentals.

   

  Speaking of Trump, who could have thought that not only would Donald Trump win the Republican nomination, but also be a viable President as polling in a Clinton vs Trump contest now suggests. We note that whilst almost universally disliked by Australian’s (including ourselves) Trump is trending and evolving as a candidate. The speed of his transformation bares monitoring as markets and investors need to consider what that might look like come the November election. Gone is the yelling and the abuse, replaced by all-inclusive statements across minorities. Americans love re hab and re birth, can Trump be emerge as a front runner?

   

  We will also continue to monitor act IV in the Greek financial tragedy, as the Greek Government is again running out of money and wants its bailout loans extended from its EU saviours, who are currently unwilling. We also must watch the European migration crisis (most migrants arrive in Europe via Greece who is broke) and the evolution of BREXIT debate (Britain voting to leave the EU) and possible market contagion.

   

  Jamieson Coote Bonds Active Fund has performed at a monthly run rate of +53 bps (gross) since inception for a return of 8.55% (gross) running a portfolio of AAA and AA rated Government Bonds. The largest draw down in any month has been -62bps.

  MARKET UPDATE MAY 2016

   

  JCB ACTIVE FUND IS UP 9.83% (GROSS) OVER 18 MONTHS SINCE INCEPTION IN DECEMBER 2014, RUNNING A PORTFOLIO OF LONG ONLY AAA AND AA+ RATED, EXPLICITLY GUARANTEED GOVERNMENT BONDS.

   

  RBA CUTS WITH MORE TO COME, FOMC SPINS 180 DEGREES PLAYING CHICKEN WITH MARKETS, RISK LURED IN LOW VOLATILITY FATAL ATTRACTION?

   

  The RBA cut rates in May and will deliver another 25 bps cut by August, taking the cash rate to 1.50%. This has been JCB core thesis for some time, however, we would caution investors about getting overly excited about further rate cuts given the data at hand. Many market commentators who did not forecast these moves are now calling for 1.00% RBA rates by year end. This looks excessive in our opinion. Whilst RBA Governor Stevens stridently defended inflation targeting this month, calling it the ‘’best policy framework we’ve ever had,’’ a period of pause and access is warranted from the RBA after providing the economy with additional stimulus via lower rates and currency.

   

  The AUD closed over 5% lower vs USD over the month and looks set to test the 70 cent level in coming weeks. We had expected more support in the currency around the 200 day moving average of 72.50 area, however, weaker domestic data during the month of May has kept pressure on the currency. Employment remains tepid at best (having lost more than 50,000 full time jobs in 2016 whilst creating more part time work), CAPEX data remains weak at -5.2% and company operating profits declined at -4.7%.

   

  The release of April’s FOMC minutes in late May has recalibrated rate hiking expectations in the United States. After being as dovish (supportive of low interest rates) as possible in March, this move to hawkish commentary (supportive of higher rates) is a huge turn in a short time. The FOMC need to be careful treating the market in this way, as they risk a loss of credibility in changing the messaging so deliberately to drive market outcomes (clearly the dovish Yellen press conference of March was to lower the USD and ease financial conditions). We remain of the view that additional rate hikes in the US will be extremely gradual. The FOMC will pass in June (meeting date 15th) as macro markets have significant event risk later in the month with Bank of Japan meeting on the 16th, BREXIT 23rd, ECB TLTRO allotments 24th and Spanish general elections 26th. July is a possible month to hike, however, markets are only currently priced 50/50 at this stage with near term expectation’s being driven by a clear passage of the above global macro market risks. Markets traditionally get volatile in Northern summer trading, hence clearing this list without some hiccups seems unlikely to us.

   

  We wrote in our April monthly that ‘’well diversified portfolios will continue to perform in all scenarios. If you don’t have a balance of growth, income, defensives and liquidity then you could be in for a bumpy ride.’’ So far there have been very few bumps along the road. As financial market volatility drops, risk levels are increased and times are good. The main narrative for the risk market bulls has remained that declining market breadth, deteriorating high yield debt and lower oil prices would not matter (noted these 3 measures have all improved over the last few months), and the bull market will rage on driven by extraordinary Central Bank policy intervention. This may very well be the case, however, the problem as we see it is the lack of corporate earnings. According to FactSet 72% of S&P 500 companies reporting so far have issued negative guidance for Q2 on top of declining earnings for Q1, and yet US equities remain very close to recent highs. Well played Ms Yellen, you certainly have the market snookered for now. However, without a base in US earnings, markets will remain susceptible to bouts of volatility. Either earnings improve to justify valuations or the attraction of performance in lower volatility could prove fatal when the winds change. But it may not. Investing in a policy driven environment is very difficult as policy can trump fundamentals for long periods. Is it better to risk the loss of opportunity or the loss of capital? As conservatives investors we have strong views on this question.

   

  Jamieson Coote Bonds Active Fund has performed at a monthly run rate of +54.6 bps (gross) since inception for a return of 9.83% (gross) running a portfolio of AAA and AA rated Government Bonds. The largest draw down in any month has been -62bps.

  MARKET UPDATE JUNE 2016

   

  JCB Active Fund is up 11.13 % (gross) over 19 months since inception in December 2014, running a portfolio of long only AAA and AA+ rated explicitly guaranteed Government Bonds.

   

  REMAIN ON HIGH ALERT, KEEP CALM & CARRY ON, CRISIS MANAGEMENT IN POLITICAL VACUUM

   

  History does not repeat, but it can often rhyme. At the time of writing 6 retail UK property funds with $18 billion of assets have been frozen to investors sighting ‘’exceptional illiquidity.’’ These fund providers are all household names in the UK. Standard Life, Aviva, Aberdeen Asset Management, Henderson, Threadneedle and Canada Life now have products seized shut by market liquidity vanishing just like that.

   

  In 2008, Bear Sterns froze two subprime funds (Bear Sterns ultimately failed) in what is often described as the prelude to the GFC, sparking contagion fears around all markets. The 2nd and 3rd round implications from BREXIT continue to playout and it is too early to know if this will morph further towards a full blown crisis,or be contained and perhaps another buying opportunity for quality assets. We believe more patience is required with this scare then previous market wobbles in August 2015 and Jan 2016.

   

  As it stands today, the UK remains leaderless in all 3 major political parties. It is the first sovereign ever to be double downgraded from AAA to AA (usually go to AA+ first), and its GBP currency has suffered a peak to trough depreciation of 15% so far. Spare a thought for any businesses with USD debts but GBP revenues. Two weeks on from the vote we are no closer to understanding how BREXIT will work, what timeframes are required or who will lead the complex negotiations with Brussels. This situation requires heightened monitoring and will continue to dominate investor sentiment.

   

  Unfortunately BREXIT has let the volatility genie out of the bottle. The ripples of such large moves in GBP currency markets will not remain contained. Central banks have used policy to fight poor fundamentals and dampen volatility since the GFC, however, this is different. After the one off shock of BREXIT we are now left with a number of continuing unknowns which cannot be easily dampened. In our last two monthly’s updates we have advised investors that ‘’we have concerns about macro events coming up, but well diversified portfolios will continue to perform in all scenarios. If you don’t have a balance of growth, income, defensives and liquidity then you could be in for a bumpy ride.’’ The bumps maybe just beginning. Good planning and process and asset allocation will be critical to holding investors in good stead.

   

  Crisis management follows an obvious playbook. The better prepared and cooler the head, the better the financial outcomes. Keep calm and carry on trading perhaps? Volatility produces wonderful opportunities to both buy and sell assets, but investors must have a plan and stick to the script as these opportunities present themselves. Today’s bid can be tomorrows offer very quickly and vice versa. High quality assets may be dragged cheap making for good buying, low quality will be dragged down and may not recover. Liquidity management remains paramount, leverage, margin loans or high debt burdens need careful consideration as margin requirements can be increased or loans called at short notice.

   

  In the aftermath of the BREXIT vote Jamieson Coote Bonds hosted a brief 30 minute conference call for investors to utilise the collective financial experience of the founders and advisory board members Saul Eslake and Mark Burgess, to discuss the opportunities and risks presented by such a shock vote. A recording of the call is still available on 1800 154 669, please use passcode 2386 78009.

   

  Jamieson Coote Bonds Active Fund has performed at a monthly run rate of +58 bps (gross) since inception for a return of 11.13% (gross) running a portfolio of AAA and AA rated Government Bonds. The largest draw down in any month has been -62bps.

  MARKET UPDATE JULY 2016

   

  JCB Active Fund is a portfolio of long only AAA and AA+ rated explicitly guaranteed Government Bonds. Since inception annualized returns are currently 6.57% net of all fee’s.

   

  • Hope for the best and plan for the worst

  • RBA to pause for 2016, resume rate cuts in Q1, 2017

  • Trumped – how high can Mexicans pole vault in Rio?

  • Paul Chin joins JCB investment team

   

  We did it your honour! Has it really been seven weeks since BREXIT? "What BREXIT"? we hear you say.

   

  Long seasoned markets professionals really worried about BREXIT, ourselves included. Collectively between JCB management and our advisory board we have hundreds of years of markets or corporate experience, having occupied senior roles in large financial institutions and corporations over long time frames. Collectively we really worried and hosted a conference call in the days after, dusting off the crisis playbook. We had a plan to have substantial plans if required. Good investment process would be critical. We hoped for the best but planned for the worst.
  
  To date, all that worry has all been in vein. Vacant political posts in the UK have been filled and BREXIT looks to be a very slow and drawn out process. Unless you own GBP assets (which has hurt) there has been little negative impact for Australian investors. In fact, perversely, it was a great opportunity with many asset classes rallying on immediate Central Bank support for markets.
  
  The incredible resilience of markets this year had caught many by surprise. We have written about policy vs fundamentals previously and how ample liquidity and low interest rates can keep on keeping on, despite the financial building blocks of today's markets being untested over time. It is not growth and prosperity that is driving asset values, but immense central bank support and stimulus. The longer this goes on the more accepted and mainstream it becomes. Intuitively there seems a danger to this complacency. Tepid fundamentals matter in the end but the current global policy mix remains very supportive for all asset markets. Asset quality remains critical and will really matter when we hit the end of the policy super highway. Predicting when that day comes is futile, as it could be many years away. We are dealing with policy that has never been utilised before and learning some of the side effects as we go (middle class distress and growing wealth equality) It has an end point, but for now asset owners remain prosperous.
  
  The RBA delivered as we expected in early August, completing our 50 bps of expected cuts in 2016. We believe a period of pause and assess will see out the year before they are drawn into cutting again an additional 50 bps in 2017 due to currency appreciation and continued weak inflation, remaining below the RBA target range of 2-3%. The RBA still retain an easing bias keeping a November cut a possibility, but the hurdle is high for a further move on current data. Many commentators have vastly re rated RBA cash rate estimations over this 2016 cutting cycle with Morgan Stanley, JP Morgan, Macquarie and NAB all now calling for 1.00% RBA rates into 2017.

   

  Trump. So how high can Mexicans pole vault in Rio? We have written about Trump gaining momentum in a world effected by nationalism (producing BREXIT, Le Pen, Italian northern league, Pauline Hanson etc) This global wave of anti-establishment populism can carry Trump to the White House if he can stay out of his own way. It's been a torrid few weeks with criticism of fallen US Muslim soldier, abusing crying babies and refusing to address Paul Ryan and John McCain, the lifeblood of Republican Party. Markets are not taking Trump seriously at this stage. It is early to write him off but he must avoid Trumping himself. If he learns from these slips and stays tighter lipped, expect a bounce in polling numbers and nervousness from markets.

   

  Finally we are pleased to welcome Paul Chin to the investment team at JCB. Paul joins after a 20 year asset management career with BGI San Fransisco (now Blackrock) and Vanguard in Melbourne. This takes the JCB investment team to 52 years of investment experience, of which 30

  years has been in international markets.

   

  JCB is a conservative fund manager, with capital preservation and risk adjusted returns being our core tenants. If we cannot find compelling risk adjusted opportunities to invest your money we will not allocate, preferring benign low duration short dated bonds with little risk. Our models and processes considered the moves around BREXIT to be excessive and as such we sold some longer dated bonds after strong performance, looking to re set when markets cooled. As at July's close that return to "fair" value had not been completed and we have under-performed our index over the month, albeit whilst generating strong absolute returns of 3.20% net of fee's over the last 3 months. Indexes are funny things, having portfolios at maximum risk at all points in the pricing cycle. They represent the opportunity set of a market place. We fundamentally disagree with passive index investment and aim to run the least amount of risk for our returns, a process that has delivered to date with the JCB active fund using only 80% of market index risk to outperform the index since inception. This makes our return profile stronger over time. At the time of writing we have outperformed in August as the market has cooled. We now believe the bond market to be at fair value for current monetary policy settings. We have added some spread risk to the portfolio over July looking to earn additional carry over the quieter European Summer period.

  MARKET UPDATE AUGUST 2016

   

  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).

  MARKET UPDATE SEPTEMBER 2016

   

  JCB Active Fund is a portfolio of long only AAA and AA+ rated explicitly guaranteed Government Bonds. Since inception annualized returns are currently 6.60% net of all fee’s.

   

  ● Volatility arrives on cue in Sept; Deutsche Bank gives risk a scare

  ● Negative media count at 16 year highs for bonds, contrarian signal?

  ● What would total returns look like in a mirror image bond sell off? You should ‘’bear’’ that in mind.

   

  September produced the challenge to status quo in markets we had written about in the August monthly, with increased volatility across all asset classes. Markets continue to grapple with quantitative easing policy and balance sheet expansion and contraction in the central banks of Japan, the US, Europe, and England. To see out the year we also have to contend with the US presidential election, Italian senate referendum - a possible BREXIT moment for Eurozone - and stressed European Banks, led by Deutsche Bank and Commerzbank.

   

  All of these possible event risks would normally drive investors towards the safety and security of Government Bonds, and yet mainstream newspaper or social media feeds tend to be extremely negative towards bonds. In fact, the ‘’hawkish’’ (higher interest rates) count in global media is something that quantitative analyst Neil Tritton (and our London-based Advisory Board member) monitors, peaking at a 16 year high in September. We have seen

  headlines such as ‘’short of the century’’ and ‘’end of bond bull market’’ littering media outlets. This is misleading. Bonds may well find a new post BREXIT valuation range, however, to achieve a sustainable sell off would require central banks to materially and consistently lift interest rates. Globally this looks extremely unlikely after rate cuts this year from Australia, Japan, Europe, New Zealand and Canada. The ‘’bears’’ tend to forget that the record asset prices we are all enjoying are a result of low interest rates, but the mirror image would be a brutal deleveraging which happens much faster than a re-leveraging that we have already experienced. It is hard to see how any central bank would be a material interest rate hiker into collapsing financial asset and property prices.

   

  The other major problem for the bond ‘’bears’’ is time. If you are short or underweight bonds, unless the market sells off immediately, you are paying away ‘’carry or coupon’’, ie the interest payments made by the bond’s issuer (in our case, Australian dollar denominated Governments). That carry or coupon is all powerful over time and is the main source of return for this asset class. An August 2016 study by Bank of America/Merrill Lynch looked at bond returns in a bear market that entirely mirrors the rally of the last 30 odd years. A bloodbath you might think, with bond yields getting higher and higher over that time. Assuming an investor stayed invested throughout that period, the returns are incredible. German Government Bonds, starting at a negative observable yield, produce a total return in excess of +350%. US Treasury Government Bonds returned more than 400%. Australian Government Bonds were higher again. That discredits the long-term ‘’bear’’ narrative. This major advantage of bond ownership is that carry or income continues to grow as the market sells off. Bonds are entirely unique in this manner: as their price declines the income opportunity set of the asset class grows. When bonds rally, investors are in receipt of ‘income’ (coupon/carry) plus an unrealised capital gain. When bonds prices decline, investors are still in receipt of income, whilst also having an unrealised capital loss. This unrealised loss does not need to be crystalised. If you own a bond to maturity, you will receive income during the ownership period, plus return of principal upon maturity. The critical thing to assess, of course, is the creditworthiness of the bond-issuer - in our case AAA and AA+ rated Governments, to repay in the future.

   

  Diverse opinion from buyers and sellers is a hallmark of financial markets. Bulls and bears set the market clearing price and the challenge is to pick the optimal time to buy and sell in all asset classes, whilst at the same time maintaining a balanced asset portfolio that spreads and reduces risk. We always suggest a balanced and diversified portfolio, in which government bonds, with income guaranteed by government and immense liquidity, are an anchor or bedrock asset class. Investor life-cycle and risk tolerance thereafter will dictate the allocation size as a percentage of the portfolio.

   

  We still maintain that AUD bonds are broadly range-bound over the balance of 2016 as the RBA move to the sidelines into a pause and assess phase. However, given the extreme negative sentiment of the media, any ‘’shock’’ could produce a powerful rally, as underweight investor positioning would be seriously challenged. The market is priced the FOMC to raise interest rates once in December and has already discounted this scenario. We would expect Bonds to do well on any such move, similar to the powerful bond rally after the singular FOMC hike in December 2015. We continue to tactically position the portfolio around this opportunity set and will continue to manager through the volatility.

   

  Fund update for September

   

  JCB Active Fund returned -9 bps (gross) in August, beating the index significantly by 28 bps. Government Bonds traded in a wider range over the month, with the curve steepening aggressively on the announcement of a 30 year syndicated new issue for the Australian Government due in early October. The fund retained an underweight position early in the month which generated outperformance verses the index on the selloff. Markets also grappled with changes to the policy mechanics of the Bank of Japan’s Quantitative Easing policy, which now seeks to steepen the Japanese bond curve to improve the net interest margin for financials. Additionally, the threat of a September FOMC rate hike loomed over the market. Both of these event risks passed without major incident, and we added duration thereafter, moving towards index allocations into month end, locking in outperformance over the month versus the index.

   

  We will look to set tactical underweights and steepening positions into the pricing of the new 30-year bond, as we believe this will be offered at a discount to fair value over the medium term and hence will look to participate in the new syndicated deal in early to mid-October.

  MARKET UPDATE OCTOBER 2016

   

  JCB Active Fund is a portfolio of long only AAA and AA+ rated explicitly guaranteed Government Bonds. Since inception annualized returns are currently 5.43% net of all fee’s.

   

  • Assets markets get hit ahead of US election

  • Inflation remains problematic for RBA, but SA floods produce temporary headline CPI pop

  • Exceptional supply drags on bonds prices in October

   

  Investment markets decayed in October, pricing in additional risk premium ahead of the US presidential election. Both equities and bonds suffered declines over the month, as investors repositioned to face the prospect of a Trump presidency. Investment markets grew increasingly confident that the FOMC would complete on a single rate hike by year end in their December meeting, assuming the market could navigate the US election and Italian Senate referendum without major hiccup. Volatility continued to increase across most markets, led by GBP Sterling currency

  which suffered a ‘flash crash’ of over 6.00% early in the month.

   

  Australian inflation remains problematic for the RBA, with Q3 data showing year over year CPI weighted mean decaying to only 1.3%. Headline inflation came in stronger at 0.7% quarter on quarter, but this was significantly affected by South Australian floods causing a 20% rise in fruit and vegetable prices. Once supply normalises in these fruit and vegetable producing regions, this headline shock will be removed, causing a future drag on the already weak domestic inflation picture. This continued decay in domestic inflation, combined with AUD currency which refuses to

  fall, maintains a slight easing bias at the RBA into 2017. Notwithstanding the prospect of a rate hike from the Federal Reserve in December; the fact that it has taken the combination of still incredibly easy monetary policy in the developed world and a surge in credit growth in China to produce around average global growth suggests that the prospect of much materially higher global interest rates over the next few years remains highly remote. And given the sensitivity of the Australian dollar to differences between Australian and global interest rates, that would also suggest that an historically low RBA cash rates are likely to remain a feature of the Australian economy for some time.

   

  Over the course of October, bond markets initially decayed, following international markets higher in yield. In the middle of the month, two specific transactions contributed substantial supply to the market over an 8-day period, in the issuance of Australia’s first ever 30-year Government Bond and an interest rate swap transaction for the sale of AusGrid electricity network in NSW. This supply was truly exceptional in both size and market risk. Initially the Government had telegraphed a desire to issue 4 billion 30yrs bonds. Upon opening the transaction, the initial order book was north of 14 billion in a matter of hours, and as such the government upsized the transaction to 7.6 bln. This alone was the largest ever duration issue in Australian Fixed Income history. Hot on the heels of this transaction was the AusGrid interest rate swap which produced around 10 bln of varying but longer dated maturities of duration supply to the market. This is exceptional because the combined duration of both transactions issued in a 8 day period eclipsed the entire duration of the Australian Government Bond market of 2007. Put another way, how much market concession would be required to re IPO the ASX equity market of 2007 in an 8-day period? This heavy issuance was a

  major contributor to the pullback seen in bonds prices over the month.

   

  Fund update for OCTOBER

   

  The JCB active fund declined by -1.48% (gross) in October, beating the index by 0.35%. The fund remained cautiously positioned vs the market heading into the month, retaining an underweight duration exposure and curve steepening structures in anticipation of long end supply concessions. After a significant duration concession in the issuance of the new Australian 30 year bond, we lifted the portfolio’s exposure back toward benchmark, capturing outperformance in the process. The Ausgrid transaction was unexpected by the market and hence we didn’t manage to generate any

  additional alpha return around this market movement, but did suffer beta decay. We continue to like building the portfolio with a heavy skew to short dated bonds that now carry at positive yields vs the RBA cash rate as we believe these offer compelling risk/reward over time.

  MARKET UPDATE NOVEMBER 2016

   

  JCB Active Fund is a portfolio of long only AAA and AA+ rated explicitly guaranteed Government Bonds. Since inception annualized returns are currently 4.26% net of all fee’s.

   

  • Trump’s win pushes markets on expectation only, increases risks for portfolio’s

  • Lifting the service cost on $240 trillion of global debt

  • Whilst global markets focus on Trump, Australian domestic data collapses

  • Observations of buyers and sellers of Australian Government Bonds

  • Australian Banks hiking mortgage rates ‘out of cycle’ as funding costs increase

   

  Trump’s win pushes markets on expectation only, increases risks for portfolio’s -

  Positive Trump momentum has reigned supreme in markets since the US election, with themarket moving to a euphoric state factoring in expected future growth and inflation in the United States. Only time will tell if this fully materialises and what the implications will be for global trade and financial assets. As is widely known, markets move quicker than policies and in turn new infrastructure identification, planning, funding, and employment takes even longer.

   

  From a technical perspective looking forward via a normal distribution bell shaped probability curve, the possible financial market return outcomes have widening significantly to both the up and downside.

   

  Under a Trump led US Government we will likely get strong near term US growth, but we might also suffer broader global geo-political tension. This could have an impact on borrowing rates (as outlined further below) that can endanger global markets given their heavily indebted nature post the global financial crisis (GFC). The only constant that seems assured in 2017 is market volatility, making diversified portfolio’s critical to navigating future investment markets twists and turns.

   

  Jamieson Coote Bonds notes that we have been here before post GFC; via similar financial market moves on the election of Obama, with the commencement of multiple QE programs and with Abenomics in Japan. These moments were suggested at the time as the catalyst for job creation, delivering sustainable growth and generating inflation. Sadly as we know, none of this has occurred. The outstanding question is - can Trump succeed where other capable leaders and programs have failed? It is of course too early to answer this question in full, but the markets have certainly priced in lofty expectations as evidenced by the ‘asset side’ of Trump’s future Presidential term, with little regard for the ‘liabilities’ side that will provided economic headwinds to Trump’s term in office.

   

  The prevailing US commentary around lower taxes, stimulus spending and deregulation are all welcome near term, but cutting your income (via tax cuts) whilst spending more, plus allowing bankers free rein isn’t a sustainable or healthy proposition for the longer term.

   

  Lifting the service cost on $240 trillion of global debt -

  Since the GFC, global debt levels have increased dramatically from $140 trillion to over circa $240 trillion. All this new debt has essentially been created from zero interest rate policies, given the lower rate environment we find ourselves in. This debt of course requires servicing, as it must be rolled forward as it matures over differing time frames. The Trump euphoria has seen US borrowing costs climb quickly in expectation of higher growth and

  inflation. This has had the impact of causing an immediate in specie tightening of financial conditions, as the cost of servicing this huge debt load has in effect increased. Combined with a stronger USD currency, the market has essentially hiked interest rates in the United States during November. These events will most likely be followed by the Federal Open Market Committee (FOMC) hiking rates on December 15th and Jamieson Coote Bonds notes a rate

  hike is 100% priced in markets (as observed by the indicative US Fed Funds Futures contract forward pricing), leaving US consumers with essentially a double financial tightening for their hip pockets into 2017. This should have a short-term impact on standard US mortgage, car loans and student debt serviceability levels and will create a drag on future US economic growth levels and expect weaker incoming data to support this view and will be watching this

  with keen interest in the New Year.

   

  Whilst global markets focus on Trump, Australian domestic data collapses -

  While Australian interest rates have historically risen in sympathy with US rate moves, Australian economic data has recently fallen dramatically. In sequential order over the last few weeks the Australian economy has:

   

  • Recorded its weakest ever wage growth - important due to high correlation to inflation data which is still weak at 1.30% YoY and below the 2.00 to 3.00% RBA mandate,

  • Lost 12,000 full time jobs on average each month during 2016, whilst creating part time work (structural under employment),

  • Construction work completed has dropped -4.9% in Q3, its weakest reading in 15 years (key indicator as construction has helped fill the void left after the mining boom)

  • Building approvals fell -24.9% in October following a decay of -6.8% in September, placing pressure on the construction pipeline into 2017.

  • CAPEX intentions (as tracked by the ABS ) continues to fall posting -.00% for Q3; and

  • GDP for Q3 was significantly below the weakest estimates at -0.5% posting negative quarterly growth

   

  Without the recent Trump associated market moving headlines, we would normally be discussing when the RBA would be cutting interest rates to stem the recent poor domestic data flow. Ironically, Australian banks have however been increasing mortgage rates on fixed and variable products in response to the higher cost of funds. This is worrying as this comes at a time when Australian debt to income is at record highs, making Australian consumers

  very sensitive to interest rate movements. Should the Banks continue this trend whilst the domestic data remains so weak, the RBA will be forced to react by cutting interest rates.

   

  Observations of buyers and sellers of Australian Government Bonds -

  Flows remained mixed over November period from international holders of Australian Government Bonds. Selling was noted as emerging Asian Central Banks raised cash to defend local currencies against large moves. Local managers have trimmed risk in longer dated bonds as the market re calibrates inflation expectation, but added risk in short dated

  bonds in recognition of the poor domestic data. Sovereign wealth managers remain cautious on bonds currently given the speed of the move post Trump, however, there remains broad agreement that valuations have improved significantly, and once the asset class stabilises Australian rates are favoured given the weakening domestic data and high yields on offer. Australian Banks hiking mortgage rates ‘out of cycle’ as funding costs increase.

   

  Jamieson Coote Bonds concluding remarks

  After rapid market moves post the US election, opinions among asset owners and CIO’s are widely distributed. Without question, we are entering a period of higher uncertainty about US monetary policy and higher uncertainty about fiscal and structural policy. This will lead to continued higher uncertainty around the direction of the global economy with increased volatility for investment markets. The current and likely future macro-economic backdrop will likely lead to various different outcomes for investment portfolios.

   

  The ‘expectation’ of Trump must meet ‘realisation’ into 2017 to justify the recent new valuations for growth and defensive assets will be tested at a time of record debt burdens. As investors are aware, there is a concrete relationship between the price of money for borrowers (i.e. individuals and corporate) and the financial health of markets. In this regard, Jamieson Coote Bonds is of the view that further material increases in the price of money may begin to impact over leveraged consumers and an over-indebted corporate sector, which could start to

  impact risk asset valuations.

   

  If this trend continues, markets should reach a tipping point where a broader deleveraging cycle begins, which will put a drag on global growth and in turn dent risk asset valuations. With volatility looking set to be our only constant in 2017, portfolio diversification remains as critical as ever. The likely future significant divergence between asset classes provides a compelling backdrop to incorporate cornerstone defensive allocations in portfolios. Australian Government Bonds can offer investors this true to label exposure.

   

  Fund update for November

   

  The JCB active fund declined by 1.69% in November, outperforming the Bloomberg AusBond Treasury (0+Yr) Index by 0.17%. The fund remained underweight duration during the month, with a preference for holding short dated bonds (which are more heavily driven by RBA policy) and was underweight positions in longer dated bonds (which are driven

  primarily by inflation expectations). JCB notes the increase in short dated yields as being particularly unusual given the extremely poor domestic data flow experienced over the month. Moving forwards, as RBA rate hikes are extremely unlikely given the poor recent domestic data, combined with the tightening of financial conditions via out of cycle bank rate hikes, we will look to increase positioning in the front end of the curve on any further price cheapening.

  MARKET UPDATE DECEMBER 2016

   

  JCB Active Fund is a portfolio of long only AAA and AA+ rated explicitly guaranteed Government Bonds. Since inception annualized returns are currently 3.95% net of all fee’s.

   

  “If I were to run, I’d run as a Republican. They’re the dumbest group of voters in the country. They believe anything on Fox News. I could lie and they’d still eat it up. I bet my numbers would be terrific”. Donald J. Trump, soon to be the 45th President of the United States of America."

   

  • The only certainty from here is volatility: well-diversified portfolios will be positioned   to ride the tides

  • The US policy agenda according to Paul Ryan, Speaker House of Reps: right-size growth expectations
  • What happened to the four US FOMC rate hikes expected at start of 2016? Finally, the market gets over the line with a hike in December
  • Domestic data remains poor into year end 2016, AAA safe for now
  • Some observations of buyers and sellers of Australian Government Bonds

   

  The only certainty from here is volatility: well-diversified portfolios will be positioned to ride the tides -

  Positive President-elect Trump momentum continued through December – equity markets have baked in lofty expectations of economic growth in the form of strong asset valuations. In reality, the incoming Administration will actually need to deliver on these promises, and Inauguration does not occur until mid-January.

   

  JCB feels this is likely to be a bumpy process, causing gyrations and volatility over the coming months as Trump learns that running a Government is vastly different than running a business. Without question the range of possible market outcomes have widened significantly given the large political policy changes ahead and the possible ramifications. Predicting the outcomes of tough negotiations with House and Senate Republicans is difficult at the best of times, as well as any response from China and Russia to such developments. This will shape the environment into H1.

   

  Whilst it is tempting to position portfolios in line with current momentum, we note that the market is now heavily skewed towards a successful implementation of Trump’s economic plan. In short, any gap between expectation and reality may cause an outsized market reaction. As always JCB advocates a balance portfolio approach, particularly in times of expected heightened volatility.

   

  The US policy agenda according to Paul Ryan, Speaker House of Representatives: right-size growth expectations -

  1. Affordable care act reform (Obamacare)
  2. Regulatory overview (Dodd Frank)
  3. Securing the border
  4. Modernise the military
  5.  Tax reform
  6. Infrastructure

   

  In private meetings with senior US Investment Banking executives held in NYC early January 2017, Paul Ryan listed the above agenda items in order of priority as discussed with the incoming Trump Administration. Last month JCB highlighted the often significant time lag of implementing infrastructure spending due to time delays of project identification, planning, funding and contracting the tender process. Infrastructure spending can be major plank in stimulating economies; given this is a stated low priority for the new Administration (according to Ryan), some caution is warranted in a market that is anticipating immediate and sustained growth.

   

  What happened to the four US FOMC rate hikes expected at start of 2016? Finally, the market gets over the line with a hike in December -

  At the beginning of 2016, the market had priced in four expected FOMC rate rises for the year ahead. For reference, calendar 2016 saw market participants expecting a ‘normalisation’ of US interest rate policies being disappointed. What played out in 2016 (which was much like 2015) saw twists and turns that delayed and frustrated the rate hawks. Finally, in December the US Federal Reserve managed to hike interest rates once.

   

  Many market pundits for 2017 are again expecting a number of rate rises, with current market pricing suggesting three moves. JCB has written for some time about the difficulty of raising rates in an environment saddled by high debt. Considering the current position and conditions, we believe two hikes (rather than three) is more likely for 2017.

   

  Some observations of buyers and sellers of Australian Government Bonds -

  Financial market flows remained mixed over December from international holders of Australian Government Bonds. We noted selling tendencies early in the month as emerging market Asian

  Central Banks raised cash to defend local currencies moves. Later in the month Sovereign Wealth Managers and international real money managers started to accumulate bonds after the significant cheapening. This dynamic saw bond valuations lift materially into the end of the month. Overall flows volume remained below average given the December and holiday period.

   

  Jamieson Coote Bonds concluding remarks

  Markets are entering a period of higher uncertainty about the path of US fiscal, monetary, and structural policy. Geopolitical events have the possibility to destabilise the status quo bringing volatility to investment portfolios.

  The ‘expectation’ of Trump must meet ‘realisation’ in 2017. Jamieson Coote Bonds continues to believe that further material increases in the price of money may begin to impact over leveraged consumers and an over-indebted corporate sector. This will start to impact risk asset valuations.

   

  If this trend continues, markets should reach a tipping point where a deleveraging cycle begins. This will likely put a drag on global growth and, in turn, dent risk asset valuations further. The likely future significant divergence between asset classes provides a compelling backdrop to incorporate cornerstone defensive allocations in portfolios. Australian Government Bonds can offer investors this true-to-label exposure.

   

  Fund update for DECEMBER

   

  The JCB Active Bond Fund declined by 0.29% in December, underperforming the Bloomberg AusBond Treasury (0+Yr) Index by 0.12%. The Fund remained underweight duration during the month, with a preference for holding short-dated bonds (which are more heavily driven by RBA policy). We positioned the Fund to be underweight in longer dated bonds (which are driven primarily by inflation expectations). JCB notes the increase in short dated yields as being particularly unusual given the extremely poor domestic data flow experienced over the Q4 period. The fund held a larger exposure to Supra bonds (World Bank etc) as we remained concerned that a cut in the Australian Government credit rating from AAA to AA+ was possible through the budget update period. Supra Bonds would remain AAA rated, and hence would materially outperform in this scenario.

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