Jupiter: Inflation Will Rise to 3%

Inflation will rise, but will Bank of England Governor Mark Carney react? And if interest rates rise what does it mean for bond investors? We talk to Jupiter's Ariel Bezalel

Emma Wall 13 February, 2017 | 12:32AM
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Emma Wall: Hello and welcome to the Morningstar series 'Why Should I Invest with You'. I'm Emma Wall and I'm joined today by Ariel Bezalel, Manager of the Jupiter Strategic Bond Fund.

Hi Ariel.

Ariel Bezalel: Hello. Hi Emma.

Wall: So, this week we're expecting inflation figures in the UK and they look to be higher than they were in the previous months in part due to rising oil prices. Now this of course puts pressure on the Bank of England to raise rates, so what are indeed your inflation forecast and how do you think the bank will interpret them?

Bezalel: I think over the course of the course of the next few months, we're going to see inflation numbers ticking higher and higher. You mentioned the rising oil prices, due to base effects now that's going to push the inflation numbers higher. And in addition to that, obviously, you've had the shortfall in Sterling, which is going to lead to higher import prices and inevitably higher prices on the high street.

At the moment, the Bank of England are taking a stance that is somewhat transitory and they want to try and look through this. But at the same time the surprising thing for the U.K. economy is, there's kind of been a question of Brexit, well what happened? What Brexit? Because the data at the moment for the U.K. economy is pretty strong across the board quite literally. So, you've had a number of members of the MPC now who are actually toying with the idea of raising rates. And if we start seeing inflation numbers tick higher, you could actually start to see a move in rates in the coming months.

Wall: So, what are we talking here, is it going to be 2% which is of course the target, or that has been a long time since we've had 2% inflation, or is it 3% or even 4% for the UK?

Bezalel: You could see it go comfortably about 3% over the next few months, and you know in the past, under Mervyn King's governorship, the Bank of England were quite happy to look through that and we had you know ongoing letters between Mervyn King and the Chancellor. Mark Carney seems to be very much in that camp, and as I said seems to think that these things are transitory. But, you know, I think there are a number of members out there now who are beginning to put pressure to start raising rates.

Wall: And of course, a higher interest rate is great news for savers and its great news for people who are buying a bond at that issuance. However, for those who already own bonds or were trading bonds of course, high yields means lower prices, so what does that mean for you as a strategic bond fund manager?

Bezalel: So, over the last year or so, and this is not a U.K. phenomenon, we are seeing a reflationary picture developing globally. A lot of it coming from the Far East, a lot of it coming from around Europe on some of those base effects related to oil. And then obviously, we've got President Trump, who is now talking about aggressive stimulative policies, which inevitably will lead to reflation.

So, there is very much – it's not just about the U.K., there is very much this global reflation trade going on that's bidding up commodity prices, that's bidding up risk assets in general, that are very much linked to a cyclical uptick in economic activity. So, with that in mind in our portfolios, since summer of last year on the back of a number of these concerns, we have aggressively reduced the interest rate exposure of the fund. Basically, we've cut the duration of the portfolios and I think that's the right way to be positioned tactically, probably for the short-to-medium term.

Wall: And of course, you delivered 7.5% to investors in 2016, that looks pretty attractive given if you have a look around at the government bond yields available to investors. Is that the sort of thing that we can expect again this year? Or has the environment become more challenging?

Bezalel: Well, I think for a number of the reasons, we've spoken about already, it's going to get harder and harder for bond investors, undoubtedly. And that means, we have to work harder to spot those opportunities. And a great thing about a strategic bond fund is we have that flexibility, to go out to some really interesting weird and wonderful places to find those returns. So, we're venturing a lot more into emerging markets, as well as, delving into parts of high yield in Europe and the U.S. to get those returns. But yes, undoubtedly, over the next 12 months, it's going to be harder to achieve similar returns to what we did in 2016.

Wall: Ariel, thank you very much.

Bezalel: Pleasure. Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Jupiter Strategic Bond I Acc116.98 GBP-0.21Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar