While many investors expect modest global growth despite the slowdown in China, Citywire A-rated Bob Michele believes the Federal Reserve’s decision in December could have stunted this ambition.
Michele, who is head of global fixed income, currency and commodities group at JP Morgan Asset Management, said the chances of above trend growth fall when the Federal Reserve raise interest rates when the global economy is weak.
‘It is still our primary expectation that modest global growth will prevail, but the risks are higher, as signs of late-cycle behaviour have increased. Put another way, as the US Federal Reserve raises rates against a frail global economy, the odds of above‐trend growth recede,’ Michele wrote in an investor update.
‘However, historically the Fed has raised rates because either growth or inflation was uncomfortably high. This time is different – growth is slow; wage growth is limited; deflation is being imported. As the Fed actions drain liquidity from the system, rising rates and a stronger dollar are a headwind for future US growth.’
Michele, who is named on several bond funds including the JPM Global Bond Opportunities fund, said he expects no more than three rate hikes in 2016 and global policy divergence will mean that the Fed will struggle to hit its inflation target of 2%.
In terms of holdings, Michele is cautious about US investment grade corporates as they are too dependent on global demand. The strong US dollar and commodity prices means that he is also avoiding emerging market debt.
‘In the US, high yield companies are, for the most part, domestically‐focused, have healthy balance sheets, and are positioned to continue to benefit from economic growth. The key is to find those industrials that have the financials to survive a growth slowdown and that are committed to maintaining a strong balance sheet,' he said.
In Europe, Michele favours European high yield, the bonds of peripheral European countries and hybrid capital bank debt. He thinks fundamentals are improving, leading to tighter spreads and higher prices.
‘Several of our best investment ideas come from the European markets, where central bank liquidity, above‐trend growth, and weaker currency are powerful tailwinds. At the top of our list, European high yield looks attractive to us,' he said.
'Europe is at an earlier point in its credit cycle, some already highly‐rated credits may be poised for an upgrade, and the market has little exposure to energy. Yields may seem low, given the low reference rate and higher credit quality, yet spreads are comparable to those in the US on a credit by credit basis.'
The JPM Global Bond Opportunities fund returned 7.9% in the period since its launch in February 2013 to December 2015. Its Citywire-assigned benchmark, the Barclays Multiverse TR USD Unhedged, fell 3.2% over the same timeframe.