James Foster, co-manager of the £462.2m Artemis Strategic Bond fund, says he fears the return of quantitative easing and has been making the portfolio less sensitive to inflation and policy tightening.
Foster says he has “hardly any” government bond exposure and anticipates raising his weighting in high yield, which has already gone up to 45% and is less sensitive to inflation and interest rate rises.
“Governments may resort to quantitative easing again. My advice would be to use this opportunity to sell your [government] bonds. If the ECB and the Bank of England are big buyers of bonds, I’m a happy seller,” he says.
“Quantitative easing will inevitably lead to inflation. Broadening quantitative easing would be wrong. The real pressure to do more quantitative easing will come in Europe. The US may resort to it again.” (article continues below)
Foster cites a “deluge of issuance” from governments compared with corporates, who he characterises as “much more careful” with their borrowing policies.
He also says authorities may print money to bail out banks who invested in Greek government debt, which he says will probably have to take a haircut of 30-50%.
“By then the banks will have offloaded their positions. Probably the ECB will print money to buy them up,” he says.
“This is the biggest fiscal tightening we’ve had since the war, but I suspect they won’t be able to introduce all of it”
However, Britain is unlikely to have to print up more money to buy gilts and calm government bond markets, according to the manager.
Civil unrest and strikes are unlikely to derail public spending cuts, he says, which would reassure investors’ fears over the creditworthiness of Britain.
“We’re a pretty conservative country. A revolt on that scale could happen, but I’d be surprised. This is the biggest fiscal tightening we’ve had since the war, but I suspect they won’t be able to introduce all of it. Most people are mortgaged up to the hilt. They can’t afford to strike for too long,” he says.
In the government sector, Foster sees a potential opportunity in gilts whose returns are linked to the retail price index.
The government has proposed linking pensions to the consumer price index rather than the retail price index. This reduces these gilts’ usefulness as a hedge against inflation, but does not remove it altogether in case quantitative easing causes inflation.
Foster says yields already rose from 0.8% to 1% off the back of the proposals and feels the bonds could become an attractive investment.