Since the financial crisis we have seen all of the big four developed economies implement quantitative easing policies – first the US and UK, then Japan and Europe.
However it was a game of two halves, with Japan and Europe both initiating monetary loosening within the past six months, by which point the US and UK had long since begun tracking back, with the Federal Reserve and Bank of England – particularly the former – both now considering tightening.
While some have dubbed 2015 the ‘year of policy divergence’, Jones, manager of Rathbone Unit Trust, believes that policy convergence is more likely.
“We have something I call the ‘Levi’s market’,” he explained. “On one side we have the US and the UK looking at tightening rates, and on the other we have Japan and Europe in an easing cycle.
“The story goes that the two horses on the Levi’s logo can’t break the jeans – but one of the sides of the market has to win. Either the US and UK get pulled one way and we all go into a massive quantitative easing cycle, or easing will start working in Europe and Japan and we will see growth and reflation everywhere.”
So how does this view translate into Jones’ strategic portfolio, particularly with the UK General Election looming?
“We have run the numbers and it doesn’t really matter which way the election goes,” he said. “It is very noisy noise on our portfolio, but the US economy is growing and we have an independent central bank in the UK, so we will wait to see what the central bank do.
“We are underweight duration because I am worried about the US and UK economies getting stronger. The caveat to that is what Deutsche Bank is calling the ‘euroglut’, and the weak euro causing investors to pull their money out of Europe, which could end up in the US and UK markets.”
One consensus view of the election is that a Labour-led outcome will have the heaviest impact on the gilt market.
However Jones, who holds UK gilt and UK index-linked weightings of 8.48% and 6.93% respectively, is relatively unperturbed – that is, as far as the prospect of a decisive outcome is concerned.
He expanded: “Labour would increase the amount of deficit, and therefore there would be more gilt issuance, which would put pressure on the market with supply outweighing demand. However, in percentage terms the impact will be marginal and will not detract investors.
“A Conservative-led EU referendum environment would put pressure on sterling and is more difficult to read. A weaker sterling would mean less demand for bond, but also no extra supply, so in that case the gilt market might actually be okay. The best outcome for bond markets would be a Conservative-led or Conservative majority government.
“That said, I might be mistakenly sanguine about the election. Whether the reds or the blues get in is pretty unexciting in itself. What is really dangerous is the prospect of a protracted period of coalition negotiations that go nowhere and we have another General Election in six months’ time. The worst thing for the gilt market would be investors not knowing what will happen, because they may take their money of out the gilt market.”
