Fidelity opts for yen and treasuries as top hedges
Bullishness arises despite securities taking a beating
NEW YORK: The world is careening towards a recession and buying old havens like the yen and treasuries still offers the best protection, according to Fidelity International.
“Our view is a hard landing is going to happen,” said George Efstathopoulos, money manager at the investment giant in Singapore.
“We are looking for convexity trades that should do well in a hard landing – both long-dated treasuries and yen should,” he said.
Treasuries currently make up about 2% of the firm’s global multi-asset income fund, up from zero just a few months ago, Efstathopoulos said.
He’s also buying the yen – a currency wallowing near a 24-year low thanks to the widening yield gap between policy rates in the United States and Japan – as both assets currently look “cheap.”
Fidelity joins Jpmorgan Asset Management and Jupiter Asset Management in buying treasuries on bets that a recession is a virtual certainty.
The bullishness comes despite the securities industry handing investors a record 12.4% loss this year as the US Federal Reserve (Fed) aggressively hikes interest rates to combat the fastest inflation in a generation.
Efstathopoulos, whose Us$7.7bil (Rm35.8bil) fund lost 13% in the year to Aug 31, believes treasuries are regaining their safe haven status after their recent decline.
Yields on 30-year bonds have doubled since the start of the year, while those on 10-year securities have climbed as high as 4.02% from a 2022 low of 1.53%.
The income generated from US bonds is now “way more attractive,” said Efstathopoulos, who has been funding the purchases with proceeds from selling holdings in Chinese government debt.
Fidelity is also expecting the yen to outperform as soon as the global downturn is in full swing. But unlike Bluebay Asset Management LLP, which has long yen positions on wagers that the Bank of Japan will be compelled to relinquish its grip on bond yields, Efstathopoulos said the currency is so beaten down it can only bounce back when the Fed finally starts cutting rates amid a recession.
“The big driver would be exogenous,” he said of the yen’s recovery. “It will be a Fed pivot because of a hard landing. That’s going to give a big bid to the yen.
“The pound’s losses markets might test parity between the pound and the US dollar, and that should deliver a tailwind for United Kingdom large caps. We continue to expect ongoing depreciation in the pound even at these levels,” he said.
The politics and credibility issues are still there, Efstathopoulos said. Given much higher debt levels, real yields cannot rise much faster, much higher from here because that’s a huge burden for the government.
“If we continue to see high real yields, expect more multiple corrections driven solely by that,” he added.
“Chinese equities can perhaps do better than other markets in the next 12 months or so. We’d like to be closer to where the stimulus is coming from. Some of the more renewable infrastructure areas are looking definitely more interesting.
“We’ve also done a little bit of state-owned enterprise properties. There will be long-term winners out of this, but it’s going to be a very volatile sort of trade.