Having navigated his way successfully through the worst of the global financial crisis by moving heavily into cash and Government bonds, Philip Gibbs at Jupiter has once again moved his flagship Financial Opportunities fund into ultra-defensive mode, with more than half the fund now in cash or cash equivalents, according to the latest monthly factsheet.
In an interview with Citywire last week, Philip made the following points:
- The UK financial sector has halved in the last two years and it has left valuations looking attractive. HSBC and Barclays remain the top two long positions in the Absolute Return fund.
- However there is a warning in these ratings as the economy in the West is being artificially sustained by governments. It is “complacent” to put too much in the UK when there are better opportunities in countries with stronger growth prospects.
- He has a negative view on both UK and Japanese government debt because there are better opportunities in corporate debt. “At the moment, I am long corporate and short government bonds thanks to the yield differential” .
- The economies of indebted nations are going to suffer as debt levels are addressed. Nations such as the UK, US and Japan face high and growing deficits, and without the fiscal firepower to tackle them, the situation will deteriorate if yields rose and debt finance costs rise.
- He is bearish on the outlook for both sterling and the euro because of the fiscal situations in the UK and Europe.
- He prefers emerging market debt, given the more positive economic outlook in the region. Some Western government debt bucks the trend, pointing to Norway as a good opportunity.
My comment: It remains very hard to make a case for Government bonds at current yield levels, and there are good grounds for believing that the great Government bond bull market that began in 1982 is finally breaking down, which will create an entirely new backcloth for investment decision-making over the next 10-15 years. A return to deflation, which would prevent such an outcome, cannot be ruled out entirely, but to my mind now looks good odds against.