The world is careening toward a recession and buying old haven reliables Treasuries, and the yen still offers the best protection, according to Fidelity International.
George Efstathopoulos, money manager at the investment giant in Singapore, said that the hard landing is going to happen. We are looking for convexity trades that should do well in a hard landing, both long-dated Treasuries and yen should, he said.
Efstathopoulos said that treasuries currently make up about 2% of the firm's multi-asset income fund, up from zero a few months ago. He is also buying the yen, a currency that is close to a 24 year low thanks to the widening yield gap between policy rates in the US and Japan, as both assets look cheap. Fidelity International joins JPMorgan Asset Management and Jupiter Asset Management in buying Treasuries on bets a recession is a virtual certainty. The Federal Reserve hikes interest rates to combat the fastest inflation in a generation despite the securities handing investors a record 12.4% loss this year.
Efstathopoulos, whose $7.7 billion fund lost 13% in the year to Aug. 31, said Treasuries are showing haven qualities once more after their rout. Yields on 30 year bonds have doubled since the start of the year, while those on 10 year securities have gone up as high as 4.02% from a 2022 low of 1.53%.
The income generated from US bonds is now more attractive, said Efstathopoulos, who has been funding the purchases with proceeds from selling holdings in Chinese government debt.
Fidelity International is expecting the yen to surpass the yen as soon as the global downturn is in full swing.
Efstathopoulos says the currency is so beaten down it can only bounce back when the Fed starts to cut rates due to a recession, unlike BlueBay Asset Management LLP, which has long yen positions on wagers.
The big driver would be exogenous, he said of the recovery of the yen. It will be a Fed pivot because of a hard landing. That is going to give a big bid to the yen. Here are some of his comments:
Markets might try to test parity between the pound and dollar, and that should lead to a tailwind for UK large caps. We expect continued depreciation in sterling even at these levels. The politics, credibility and credibility issues are still there.
Because of the higher debt levels, real yields can't rise much faster, much higher from here, because that is a huge burden for the government. If we were to see high real yields from here, expect multiple corrections driven purely by that.
Chinese equities can probably do better than other markets in the next 12 months or so. Some of the more renewable infrastructure areas are looking more interesting because they want to be closer to where the stimulus is coming through. We have also done a bit of state-owned enterprise properties. There will be long term winners out of this, but it is going to be very volatile type of trade.
Everywhere but America, none The Unstoppable Dollar is causing havoc.