The full impact of higher interest rates on the real economy takes around 18 months to be fully felt in an economy, and a “sharp downturn in growth” will be the consequence in the US next year, according to Ariel Bezalel, manager of the £3.5bn Jupiter Strategic Bond fund.
Bezalel has long been cautious on the outlook for the global economy, and said the idea that an economy can have a “soft landing” from a bout of very high inflation is a “fallacy.”
He said: “The foremost question in investors’ minds right now is whether recession is a certainty, or whether soft landing is still a possibility. Soft landing implies slower growth and lower inflation without inflicting material spikes in unemployment, significant pain on the economy or further weakness in risk assets. Western central banks started raising rates only towards the end of the first quarter of 2022, but the hiking process has certainly been aggressive.
The fund manager added: “Typically, economies take anywhere between 12 and 24 months to digest a rate hike or cut, depending on how levered the economy is. If history is any guide, an immaculate transition from high inflation to normalised inflation while keeping growth steady is extremely unlikely. Central banks tend to overtighten under these conditions due to the long and variable lags of monetary policy. We are entering 2023 with policy already highly restrictive, with much of the historic tightening still to be digested and further hikes to come across many markets. In our view this will spur a sharp downturn in growth that is being picked up to some extent by the recent Purchasing Managers Index (PMI) data and many of our leading indicators are highlighting this will only deteriorate out into 2023.”
In terms of how he is positioned for such an outcome, Bezalel’s six largest bond investments are government bonds, and he said: “Given the evolving inflation and growth backdrop, we find government bonds in US, Australia and New Zealand very attractive over the medium to long term.”
david.thorpe@ft.com
