“We’ve reduced risk and added more government bonds due to concern that we’re entering a year with even more volatility and big gyrations,” he told Fund Selector Asia. “We’re battening down the hatches and thinking about capital preservation. We see a world where deflation or disinflationary fears are going to be rife.”
Since 2014, Bezalel has steadily increased exposure to double and triple A-rated government bonds, which now comprise about 30% of the fund. High yield paper is near 40%, cash is 5-6% and the rest is scattered around investment grade bonds.
Europe has the highest geographic allocation of about 50%, but the two biggest positions are in Australian government bonds and US treasuries.
Australian government bonds are hedged for currency risk. “The Australian economy will continue to slow due to China’s slowdown,” he said. “The housing market is starting to slow, and that will pave the way for the Reserve Bank of Australia to cut rates.”
The fund, which follows an unconstrained approach, is up about 15% over the trailing three years to 11 January, according to FE data.
High yield risk
In December, after the US Federal Reserve hiked interest rates, Bezalel reduced high yield European exposure.
“The US credit market is going through a bit of a shakeout and credit spreads are widening, led by energy, metals and mining. Now we’re seeing the problem spread across US high yield. The fundamentals for European credit are somewhat better, but the fear is that it spreads from the US and emerging markets and starts to sprout in Europe as well.”
In the rest of Asia, exposure is limited to India, which Bezalel believes has a powerful demographic story. “The young population will be a key reason to expect economic growth.”
As a macro bet on India, the fund bought quasi-sovereign paper — utilities partially-owned by the government. Yields are around 8%, he said.
Macro concerns
“China really worries us,” Bezalel said. “We see a country that has been running investment to GDP at 40% for many years. That in turn has created a speculative property bubble, a huge amount of overcapacity. You see that playing out in commodities. Now China has caught the debt bug, especially at the corporate debt level.
“The banking system is set to go through a similar shakeout as we saw in the US banking system. Non-performing loans are being massively understated and there could be a significant shortfall in capital for a number of banks.”
Bezalel also believes the RMB is “massively overvalued” and China will have to devalue more. Countries such as Korea and Japan, which compete with China on exports, have gone through significant devaluations.
“Can China really maintain competitiveness with its currency where it is? I suggest no.”
Another risk is linked to US economic health. The fund bets on the interest rate cycle, he explained. If the economy is buoyant, inflation emerges and the Fed acts aggressively with rate hikes, then he got the macro call wrong.
“We could see government bond prices reprice significantly if the market has underestimated the number of rate hikes and that would hurt the fund.”
However, “if we’re right and the Fed raises by only 50bp over the next year and that’s it, we could see US treasuries running hard. The yield curve could come down aggressively as the market gets concerned about recession”.
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Bezalel is a designated “FE Alpha Manager”, defined as a manager who has maintained a consistently high alpha score over a proven track record in rising and falling markets.
