John McNeill, co-manager of the Kames Absolute Return Bond Global fund, says the spread of globalisation may have come to an end.
Quantitative easing may have played a part in driving the backlash against globalisation from “parts of the population for whom globalisation has meant lower income”, by boosting the wealth of asset owners, McNeill says.
“The benefits of this policy for those without [real or financial assets] is more difficult to discern,” he says.
“The long period of expansion of global trade and free flowing capital and labour appears to have met a significant roadblock, if not a dead end.”
McNeill says the influence of central banks will “remain crucial in 2017”. However, he warns that the Bank of Japan could theoretically have to continue “limitless” quantitative easing to reach its objective of capping the 10-year JGB yield at around 0 per cent, which would put downward pressure on the yen.
The manager says that relative value will come to the fore in this environment, “of which there is little”.
In the £58m Absolute Return Bond Global fund, which launched in April 2015, cross-market rate trades are a theme. In this area McNeill is looking to take advantage of the gap between US five-year notes and German five-year bonds, which has “never been wider”, at 2.5 per cent.
“These are the sort of extreme valuations that we seek to identify and exploit,” he says. “However, as short-dated yields diverge globally the cost of currency hedging has increased dramatically. We do not take active currency positions within our fund and all non-sterling exposures are hedged back to the base currency.”
McNeill remains bullish on financials, which he says “offer compelling value versus industrials and utilities”.
Financials make up 8.2 per cent of the fund, with names such as Barclays Bank, Credit Suisse, ING Bank, Mellon Capital, Rabobank and KBC Bank in the top 10.
McNeill says: “Regulatory change since the financial crisis has demanded that banks are less leveraged and better capitalised. Also, liquidity backstops provided by central banks are very generous.”
While there are various themes McNeill is looking to exploit to find alpha, he admits that on current valuations “it is understandable why investor cash holdings are so high”.
“The search for absolute value is vexed given the starting point for financial market valuations. However, there are strategies available to provide an attractive alternative to cash – and a passive exposure to fixed income makes no sense.”