- No one stays on sidelines with Brexit vote: JPMorgan AM’s Tan
- June may spark more cautious investing globally: BlueBay
When you’re global head of rates at a $1.7 trillion fund, you can’t spend a month on the sidelines to avoid risks, no matter how big.
Britain’s European Union referendum, a Federal Reserve policy decision, an OPEC meeting and the prospect of another muddled Spanish general election are all due in June. Like it or not, the biggest investors must take positions, particularly to spread their risk, according to David Tan at JPMorgan Asset Management in London.
“We can’t hide,” said Tan, adding that government bonds are in demand for their track record of weathering market volatility better than many asset classes. “The key is in the calibration of our exposures, as well as ensuring that portfolios are well-diversified.”
Money managers struggling to develop a clear market view beyond June say they’re turning to gold and the Japanese yen, which tend to benefit when investors become more conservative. Sovereign bonds from major economies are being used as a hedge even though yields are close to historic lows. They’ve slipped to below zero on $8.3 trillion of debt, or about one-third of the total, based on the Bloomberg Global Developed Sovereign Bond Index.
Even so, many bond funds are showing positive returns this year. The JPMorgan EU Government Bond fund Tan manages has earned 3.3 percent in 2016, beating 83 percent of its peers, according to data compiled by Bloomberg.
Risk events for investors start as soon as this week, with OPEC’s ministers gathering in Vienna to discuss oil output levels and prices, a European Central Bank meeting and the U.S. payrolls report for May.
June may produce “risk-off catalysts in global financial markets,” as options already are pricing in “materially higher” volatility for the end of the month, said Mark Dowding, a London-based money manager at BlueBay Asset Management LLP, which oversees $58 billion. “There clearly will be an elevated sense of risk in the month of June.”
Dowding said he’s staying away from riskier corporate bonds. Unlike fixed-income markets -- where it’s difficult to predict how an asset will react under various scenarios -- he’s using foreign currencies as the “clearest way” to hedge.
“There is universal agreement if we see a Brexit you will initially see a very sharp fall in the pound,” Dowding said, referring to Britain potentially voting to exit the EU. “In as much we are trying to hedge and protect the portfolios we are taking short sterling positions with the view to reflecting that thinking.”
A short position is a bet that an asset will lose value.
Concern that the outlook may weaken for the U.S., Europe and China, as well as mixed policy signals from central bankers around the world, have contributed to what UBS Group AG Chief Executive Officer Sergio Ermotti called a “paralyzing volatility” that’s scared away clients and caused industry-wide trading revenue to tumble to the lowest since 2009.
Even with meager yields, sovereign debt will “play a role in client portfolios as a hedge asset,” said Richard Turnill, global chief investment strategist at BlackRock, which had $4.7 trillion of assets at the end of March. He said the yen is among currencies that may be used to diversify portfolios and hedge positions.
The pound’s one-month implied volatility versus the dollar, which captures the days following the crucial EU vote, surged to its highest in six years Monday. This move far surpassed jumps seen before the Scottish referendum in 2014 and last year’s U.K. general elections.
Even if the vote on June 23 sees the pro-EU voters prevail, as London bookmakers are predicting, three days later Spain holds fresh elections after a first ballot in December failed to produce a government. Polls suggest an outright winner will prove elusive again, meaning the euro-area’s fourth biggest economy may continue longer with a caretaker government whose powers are restricted in passing laws and regulations.
Across the Atlantic, much-awaited Fed meetings before and after the British referendum have kept investors and traders guessing. The odds of a rate increase in June implied by federal funds futures almost tripled this month to 34 percent, as markets digested recent hawkish remarks from U.S. policy makers. They rise to 80 percent by year-end.
While stocks have recovered their losses this year, with the broad MSCI ACWI index up 0.9 percent in the period, gains in haven assets signal investors remain relatively cautious. Gold futures have climbed 14 percent, while the yen appreciated 8 percent versus the dollar and developed-market sovereign bonds returned 7.7 percent.
Beyond June, money managers say exceptional events also are stacking up.
Investec Wealth & Investment Ltd. is looking beyond that month to the political risks stemming from the U.S. presidential elections in November. They are buying gold as a protection, according to Darren Ruane, a fixed-income manager at the company, which oversees 26 billion pounds ($38 billion).
The precious metal now represents 3 percent of its funds compared with zero a month ago.
“Gold could do very well as people look to have a store of value if their own currency is under attack,” Ruane said. “One fear is that if Donald Trump gets in, he might be much more protectionist. If trade barriers go up, the path of currencies then becomes uncertain.”