08 Jun 2020
22 May 2020 Jupiter Independent Funds Team
You may well have missed it, but something of historic importance happened this week; a genuine first of national significance. It was never going to make the 10 o’clock news with its relentlessly negative editorial and mawkish wall-to-wall Covid-19 coverage (rapidly becoming part of the problem rather than part of the solution), but historic nevertheless, especially in the investment world. And what was this momentous event? The Bank of England issued a £3.8bn 3-year government bond which priced at a negative yield in the auction held by the Treasury’s Debt Management Office (DMO).
As the inflation/deflation arguments blow back and forth in the wake of monetary and fiscal responses to the Covid-19 economic crisis, the talk of negative interest rates in a deflationary environment has been gathering. The eurozone and Sweden already have negative interest rates and have had for more than half a decade, so the concept is not new. However, until very recently, the appetite for the US Federal Reserve and the Bank of England to employ negative rates has been minimal: debated but discarded by their monetary policy committees.
In that context, comments this week by Andy Haldane, Chief Economist at the Bank of England, entertaining the attraction of such policies was without doubt influential in the DMO auction price, as well as Donald Trump tweeting that the US “should have unlimited negative interest rates”. If inflationary forces, i.e. accelerating consumer prices, prove superior, the argument for negative interest rates is significantly undermined: if prices rise but depositors are charged when they store their money in the bank, not only is the real value of their savings being eroded by inflation, the problem is exacerbated by the additional cost of the deposit charge, multiplied again by the inexorable influence of compound interest. If deflation wins (i.e. prices fall) then the argument for negative interest rates is more persuasive, to mitigate against the corrosive effect of negative real interest rates (‘real’ rates adjust for inflation) when trying to protect the purchasing power of savers’ money.
But negative interest rates have an insidious and pernicious effect, particularly on the banking system. While borrowers are paid to borrow (a seductive argument if ever there was one!), savers are charged to deposit, the combination of the two undermining the established banking model by actively sucking liquidity from the system: borrowers take cash out (with that top-up incentive fee encapsulated in the negative interest) while depositors are actively dissuaded from lodging money in the bank in the knowledge that the actual value of their cash savings will have literally diminished overnight (assuming you’re not burgled, the money is safer under the mattress—at least it will still be there in the morning). Managed poorly, as happened in Italy and Germany since 2015, the banking model collapses and the central bank has to step in to prop them up. It should be of great interest that before the onset of Covid-19, Sweden, the first country in living memory to employ negative rates, started to raise them in an effort to get back to zero, saying the experiment had not only failed but the effect of such a policy had been corrosive.
Elsewhere, as predicted, the EU’s original €500bn Covid-19 support package has proved woefully short of what is required to restore economic health to the Union. A second, also totalling €500bn, is being proposed by Chancellor Merkel and President Macron. The funds would be sourced from the markets and re-couped through successive budget contributions by the beneficiaries. The flaw is that most of the countries who need the help are already net beneficiaries of the EU budget, receiving more than they put in. Austria, Denmark, Finland and the Netherlands, the conservative wing of the EU, are insistent that any beneficence must be in the form of properly instigated loans with full legal obligations attached. Nothing with the EU is straight forward; the splits remain deep but as ever, a compromise will be reached to nobody’s complete satisfaction.
The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each. With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions. The conditions have indeed been challenging these past few weeks; pleasingly, the Jupiter Merlin Portfolios have held up well in the circumstances.
Please note: Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the individuals mentioned at the time of writing are not necessarily those of Jupiter as a whole and may be subject to change. This is particularly true during periods of rapidly changing market circumstances.
Fund specific risks: The NURS Key Investor Information Document, Supplementary Information Document and Scheme Particulars are available from Jupiter on request. The Jupiter Merlin Conservative Portfolio can invest more than 35% of its value in securities issued or guaranteed by an EEA state. The Jupiter Merlin Income, Jupiter Merlin Balanced and Jupiter Merlin Conservative Portfolios’ expenses are charged to capital, which can reduce the potential for capital growth.
Important Information: This document is intended for investment professionals and is not for the use or benefit of other persons, including retail investors. This document is for informational purposes only and is not investment advice. Past performance is no guide to the future. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given. Holding examples are not a recommendation to buy or sell. Quoted yields are not guaranteed and may change in the future. Issued by Jupiter Unit Trust Managers Limited (JUTM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ which is authorised and regulated by the Financial Conduct Authority. No part of this document may be reproduced in any manner without the prior permission of JUTM. 25647