JCB Active fund is up 5.75 % (gross) since inception in Dec ’14 running a long only AAA and AA+ rated Government Bond Fund

RATE HIKES ARE LIKE DRINKING MARTINI’S, CHINA’S MANAGED YUAN DEPRECIATION, ASYMMETRIC RISK OUTCOMES AND A FEW THINGS TO WATCH IN 2016.

My old boss from New York came to stay over the holidays and asked if I could make him a martini for his afternoon drink. Along time ago, as the new kid on the Merrill Lynch bond trading floor in New York, I found out the hard way that to many martini's can be a very bad thing.  One is fine, it can actually be quite pleasant at the end of the day, two maybe passable, but any more is outright dangerous. And so it is with hiking interest rates in a heavily indebted global economy.  A few is possible, but any more and watch out, financial markets will be in a lot of trouble.

The US Federal Reserve (FOMC) rate hiking cycle will be slow and shallow, because the newly minted $57 trillion of global debt created since the GFC requires servicing and re issuance – both of which require low rates to avoid debt default. The rate cycle must remain shallow because if it doesn't, any way we work through the FLOW of funds thereafter, the results all end at the same place, being substantial financial market pain – and nobody wants that, least of all the FOMC who have invested $4.5 trillion dollars in various QE programs to avoid financial pain. The more likely path for rates in the near term is one or two hikes, leading to material market and data decay, followed by some kind of stimulus program, most likely an operation twist (selling short dated bonds and buying longer dated bonds to ease financial conditions).

After talking of rate hikes all year, in order to maintain credibility the FOMC needed to deliver. The December ’15 move is the first time in history the FOMC have hiked rates with two consecutive sub 50 ISM data prints (ie manufacturing contraction). GDP data was also weaker than at the launch of QE3 in Sept 2012 where the FOMC was prepared to do QE in unlimited size. We believe the economy still remains sub trend, and any rate hikes will slow economic data going forward.  We expect risk markets to suffer as a result of this hike, and the bond market will be well supported. Ordinarily, long dated bonds perform very well from the commencement of the first rate hike (in 2005 long dated bonds rallied 80 bps) in expectation of lower inflation and GDP growth and tighter financial conditions ahead. This cycle will be no different, and we are very comfortable owning duration after the Dec FOMC meeting.

One of the major themes we have marketed in December during our one on one’s has been the continued managed Chinese currency depreciation. As the USD has appreciated, China’s USD peg is unwelcome in Beijing and we expect continued managed depreciation over 2016. This exports deflation across the region and has potential to upset risk markets.

2016 looks to be a year of asymmetric risk outcomes (unfortunately skewed to the downside for many financial assets). Barring significant further central bank stimulus, it is hard to foresee what would drive asset prices materially higher. However, there are a number of issues looming on the horizon that can upset the apple cart. Energy and commodity markets will continue to weigh on risk sentiment as over supplied sectors continue to decay. With large debt maturities to be rolled forward (refinanced) in the second half of 2016, continued caution seems prudent in the energy space. Other things to watch are a resurgence of Europe’s immigration crisis coming out of winter (it’s hard to walk in the snow), further issues in the Greece debt crisis (this hasn’t gone away) and a Donald Trump Republican Presidential nomination. Geopolitics is also on the list after an eventful 2015. Russia's Putin took to the Middle East bombing campaign with fury, Erdogan of Turkey shot down a Russian fighter jet, ISIS sponsored terrorism continued across the globe, and the U.S directly challenged China, sailing a frigate through the South China Sea. In China Jinping took further measures to centralise authority and Japan’s Shinzo Abe pushed ahead with reform to re militarise.

Economic prosperity has helped keep much of the globe stable. Lets hope falling oil and commodity markets coupled with difficult emerging market conditions doesn't lead us to conflict in 2016.

FUND HIGHLIGHTS

JAMIESON COOTE BONDS ACTIVE FUND GAINED 0.26% (GROSS) IN DECEMBER, UNDER PERFORMING THE MARKET BY 0.19%.

In keeping with our core capital preservation objective, we positioned the portfolio cautiously through early December, where we believed we would need to navigate the first FOMC rate hike in almost 10 years. With improved clarity after the FOMC, we adding positioning to the portfolio to capture roll and carry over the Christmas holiday period by increasing basis positions to maximise carry.