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.