Cash doubles in expectation of market volatility
The risk of credit market volatility has led one fixed income fund to raise its cash weighting to 20%.
Speaking to Money Management, Mihkel Kase, manager of the Schroder Absolute Return Income fund, said he had increased the weighting to 20%, which was double what the fund would typically hold. This was achieved through reducing exposure to emerging markets and high yield.
“We did have some emerging market exposure and some high yield exposure but we’ve reduced both of those because we think investors aren’t getting paid to take that risk,” Kase said.
“We think valuations are stretched and you can’t see the catalyst that is going to cause markets to reprice.
“So, we want to be more defensive and have increased cash, that way we can redeploy cash if we see volatility coming through.
“We are conscious given these current valuations to take our foot off the accelerator a bit. Not because we think there will be an imminent blow-up but we do think there’s going to be some potential volatility in the credit markets.”
This defensive stance was also important as central banks moved into the next phase of their monetary policy cycle. The Federal Reserve had indicated it could start tapering this month followed by the Reserve Bank of Australia.
Kase said: “The RBA has said it will raise rates in 2024 but the market is pricing in 2022, I think it will definitely be earlier than 2024. There’s a tension between central banks and market participants in terms of when that move will be.
“Clearly we are in emergency settings at the moment, yield curve control is likely to be dropped at the next statement and it becomes about how you move out of these emergency settings given the economy’s moved beyond the need for such extreme policies.”
He said forecasting the possible path taken by central banks was the biggest challenge for fixed income markets currently.
“Over the short-term, what’s the path of central banks withdrawing liquidity out of the system and what pace can risky assets stomach that? As we move through this transition phase, I expect more volatility,” Kase said.
“Central banks’ reaction will be very important as we navigate out of this. We have had a period of relatively low volatility and as we move forward with changing policy settings, maybe growth starts to subside, this is a space where you want to maintain a defensive position.”
AUTHOR
Laura Dew
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