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.