January was an eye-popping month in political circles, if relatively quiet within the markets. The newly inaugurated President Trump departed from all political norms by actually carrying out election campaign promises. Oil pipelines are to be laid (with American pipe!), walls built, refugees halted, healthcare denied, tariffs raised. The market viewed this as being highly supportive of US company earnings, and US equities hit new highs, whilst government bonds sold off.
Strategy & Positioning
For some time we had been positioning for rate rises at the end of 2016 and the potential for further rate rises in 2017. If anything, the Trump victory, with its (perceived) consequences for inflation, reinforces the case for the Fed to hike rates.
Risky assets have already priced in a great deal of stimulus, but we believe the risk rally may have further to run. Against this, we have to consider valuations, which look poor across many asset classes. There is clearly the risk of a lurch towards more extreme politics across the European Union, with elections in major markets in 2017 and beyond. This said, we saw with the Greek crisis that even the more extreme parties do not necessarily have the mandate to drive their countries out of the EU.
Moreover, we believe the ECB stands ready to prop up the financial system in Europe should further stresses reveal themselves.
We continue to believe that some areas of the credit market offer opportunities, whereas others harbour risks. The heavy oil exposure within the US High Yield sector is of concern, whereas convertible bonds issued by Japanese companies offer significant potential upside in some cases. We continue to be selective and will back those selections with conviction.
Overall, the Fund continues to have cash to deploy, and has a degree of hedging in place to counter further downside volatility. The level of hedging employed is now significant, even turning our net exposure to High Yield bonds (as an asset class) negative at January month end.
Richard “Dickie” Hodges is manager of the Nomura Global Dynamic Bond fund.