RBA REMAINS IN PLAY

After an 18 month ‘’period of stability’’ the RBA surprised markets with a 25bp rate cut on Feb 3rd kicking off a volatile month for markets. We have argued for some time that the RBA would be required to cut rates in 2015 and fully expect further rate cuts to materialise over the course of year. The RBA rarely tweaks interest rates with a single move, making this adjustment significant as the start of a new rate cutting cycle. JCB looks for a further cut of 25 bps to 2.00% in the May meeting, after the release of Q1 inflation data which we expect to remain soft. JCB continues to retain its long held view that economic outlook for Australia remains extremely challenging with lower commodity prices and slower global growth.

Fixed income markets remained unsettled throughout February despite a month on month close move of only 2 bps in Australian Government 10yr Bonds from 2.42% to 2.44%. After the surprise RBA cut the market rallied aggressively as many domestic managers were forced into the market to cover underweight exposures. Thereafter, the stabilisation of the energy complex (oil recovered from $43.58 low to extend rally to $54.24 before settling around $50 per barrel) allowed international fixed income markets to drift lower taking Australian Government Bonds lower in sympathy. This ultimately present a buying opportunity for Australian Fixed Income.

During the month the market experienced heightened volatility around Australian political instability with a shock result in Queensland Election and spill motion against sitting Prime Minister Abbott. Queensland State Government Bonds suffered immediate losses as the planned privatisation of state owned assets looked to be shelved by the incoming Labour Palaszczuk Government, although bonds have since recovered most of those spread based losses as it seems state asset disposal remains inevitable. Prime Minister Abbott survived the spill motion although much debate continues to rage regarding the leadership of the Federal Government.

Offshore Greece was again the centre of markets attentions as the election of new populist government played hard ball with European Commission over debt restructuring and potential further bail out measures causing some flight to quality periods, although this has now been kicked further down the road with a 4 month extension. In the US, FOMC Chair Janet Yellen completed her semi-annual testimony to the House Banking Committee (Known as Humphrey Hawkins Testimony) stating that the FOMC remain on track to normalise interest rate policy assuming the incoming economic data allows. We assume a US rate hikes will commence in Q3 of 2015, albeit at a very slow pace.

Finally, last month we commented on equities market participants declaring some blue chip equities had ‘’bond like’’ returns. The hunt for yield has forced many investors to chase high quality stocks, but we were reminded with a bang during February as to why equities remain the riskiest asset class in capital chain. Woolworths (a company we shop at every day) had a slight miss on H1 numbers and the stock fell 15% in 36 hours, destroying significant investor value in the process. When equities are priced for perfection a small blip in the road can have major consequences for valuations.

FUND HIGHLIGHTS & POSITIONING

JAMIESON COOTE BONDS ENJOYED RETURNS THROUGHOUT FEBRUARY OF 0.40% MAINTAINING OUR MOVE TOWARDS OUR HIGH SINGLE DIGIT RETURNS ON A PER ANNUM BASIS.

February was volatile with bond prices closing slightly lower on the month despite a surprise RBA rate cut on the 3rd of month, causing many domestic fund managers to stop into the market, clawing back underweight exposures. The JCB Active Fund sold half its bond duration into this spike higher in prices locking in gains early in the month. The consolidation of the energy market (oil rallied from low of $43.58 to touch $54.24 before settling around $50 per barrel) removed much of the dis-inflationary force in markets and as such US Treasury Bonds led many global bond markets lower over the month. Australian Government bonds also headed lower in price in sympathy with US Treasuries, before rallying back after weak CAPAX data late in the month.