Bond fund manager Charlie Jamieson says investors got badly wrong-footed by the Reserve Bank of Australia.
on monetary policy, the RBA slashed the outlook for growth and foreshadowed an eventual rise in unemployment.He expects the central bank to raise interest rates by 0.4 of a percentage point in September before returning to a “standard” 0.25 percentage point lift in October.
He challenges market consensus and does not believe central banks will shift swiftly to easing cycles given the elevated levels of inflation. “But I don’t think that it will be a large cutting cycle into 2023,” he says, adding that once the cash rate reaches 2.5 per cent, anything above that level becomes very restrictive given the magnitude of household debt.
“There are a lot of reasons why sovereign allocations for portfolios are very credible,” says Jamieson. “Generally, they are negatively correlated to material stress,” he says, citing their strong performance through the COVID-19 pandemic.The fund does not take currency exposures and hedges back foreign investments in Australian dollars.
For months, ECB president Christine Lagarde pushed back on speculation it would lift interest rates, believing inflation was temporary.Rapidly increasing borrowing costs make Jamieson wary of corporate bonds. He expects more companies to default as they struggle to meet their debt financing obligations, particularly US businesses with high growth and low cash flow.He warns that financial markets are underestimating the refinancing risks for low-quality corporates.
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