Bringing you live news and features since 2013
Bringing you news, views and analysis since 2013

4947

Newton’s Paul Brain backs the pound to rebound

RELATED TOPICS​

Paul Brain, manager of the Newton International Bond Fund and the Newton Global Dynamic Bond Fund, says the over-sold sterling looks set for a bounce as market concerns ease.

Investors are shifting their worried eyes from Greece to some of the other significantly over-indebted Western economies such as the UK. 
 
“There’s no doubting that ‘sovereign credit risk’ is firmly on the lips of investors as the true extent to which Western governments need to address their large-scale indebtedness is fully realised,” says Brain. “Over the past couple of years we have seen unprecedented levels of fiscal stimulus, which, to a certain extent have helped to stop the rot. However, we are now at a stage at which further fiscal stimulus would simply be counter-productive. If the UK was to announce another fiscal package to support domestic demand, the markets would run scared and push gilt yields higher, and in so doing raise the cost of finance and offset any positive effects.” 
 
Brain says there is the real likelihood that the economy has become immune to further stimulus. One only has to look at the example of Japan where the economy failed to respond to repeated government-funded infrastructure projects.

There has also been a marked change in the normal relationship between government bonds and economic data; such is the level of indebtedness of the West, stronger economic data could actually become a positive for government bond markets as it reduces the high levels of debt, says Brain.
 
“Meanwhile, there is also concern when there are not enough buyers to finance this vast debt. Yes, higher borrowing costs can be delayed for in the short term by the maintenance of low short-term interest rates and the printing of money to buy government bonds, but over the medium term it needs to be paid. As such, at the moment it makes sense for banks to attempt to rebuild their balance sheets by borrowing from the government at very low short-term rates and investing along the government yield curve,” Brain says. “This helps governments fund their deficits and, as long as there is no default, the bank gets its money back as well as a healthy amount of interest during the holding period.”
 
However, while the banks are effectively lending to the government, this is to the detriment of the rest of the economy. Funds that should flow into the economy via the banking system are merely recycled back into funding government deficits. This in turn delays the recovery and keeps inflation low, and it means that investors are content to park their funds in government bonds, says Brain.
 
The stage at which market concern has a palpable effect in pushing yields higher is when there is a realisation that a country can no longer afford to finance its debt, the usual trigger being a change in short-term interest rates.

“Last year, investors were concerned about debt levels but they were content to fund the Greek deficit while interest rates stayed low,” explains Brain. “The tipping point for market concerns, in Greece’s case, seems to have been the European Central Bank’s decision to start phasing out its 12-month repo funding programmes.
 
“It is when the era of ultra low interest rates comes to an end that bond markets should be genuinely worried by high levels of sovereign borrowing. Big rises in bond yields are likely to occur when the US Federal Reserve and the ECB need to raise rates (or perhaps six months before that need arises).”

Brain says we are not there yet, but we are getting closer. In the meantime, there may be positive surprises from revenue increases and also some pay-back from the support that governments have provided to banks thus far.

“However, the UK will remain in the markets’ cross hairs for the next few months as investors digest the recent budget, the most unpredictable election in recent history, and the real possibility of another budget and a further election,” he warns.
 
While this kind of event risk in the UK makes sterling and the gilt market volatile places in which to invest, Brain says that once these events pass and we are left with a new government charged with addressing the UK’s debt-related challenges there is every chance that sterling could bounce from its over-sold position.

Latest News

The trading and investment platform eToro has extended its proxy voting feature to all stocks..
C8 Technologies, the London-based fintech founded by former BlueCrest Capital Management partners Mattias Eriksson and..
DWS has announced the latest development in its strategic growth push in Alternative Credit with..

Related Articles

The trend of private equity firms acquiring businesses in the professional services sector continues with CVC Capital Partners eyeing a possible buyout of EY’s Italian consulting branch...
The trend of private equity firms acquiring businesses in the professional services sector continues with CVC Capital Partners eyeing a..
Pension funds
UK defined benefit (DB) pension plan sponsors could have access to GBP 1.2 trillion in surplus assets over the next decade, industry research reveals...
UK defined benefit (DB) pension plan sponsors could have access to GBP 1.2 trillion in surplus assets over the next..
Tim Crawmer, Payden & Rygel
Tim Crawmer and Frasat Shah of Payden & Rygel write that higher yields are attracting more demand from investors. Also, given that equities had a strong year last year, big funds have taken some chips off the table in equities and put them into fixed income...
Tim Crawmer and Frasat Shah of Payden & Rygel write that higher yields are attracting more demand from investors. Also,..
Lady justice
Top marks for the Pensions Regulator (TPR) whose efforts to improve resilience in the UK pension funds’ liability-driven investment (LDI) strategies received glowing commendations from the Bank of England in its March report...
Top marks for the Pensions Regulator (TPR) whose efforts to improve resilience in the UK pension funds’ liability-driven investment (LDI)..
Subscribe to the Institutional Asset Manager newsletter

Subscribe for access to our weekly newsletter, newsletter archive, updates on the site and exclusive email content.

Marketing by