Magellan chief investment officer, Hamish Douglass, has said it will be a “disaster” for financial markets if interest rates were to rise abruptly.
In an investor update, Douglass speculated on the further rising of bond yields and the effect on monetary policy. He said it could also leave investors wondering if central banks had taken the correct steps in its handling of monetary policy during the pandemic.
Rates were currently 0.1% in Australia and 0% to 0.25% in the United States while yields on US Treasuries had been rising since early February to reach the highest level in a year which was causing worries about a subsequent rise in inflation.
“This may be a new inflation cycle coming so the Federal Reserve would need to raise interest rates which will be a disaster for financial markets. If you raise interest rates to head off a real inflation threat then hang onto your chairs,” Douglass said.
“It is foreseeable that higher bond yields and inflation will put pressure on markets and people will ask if the Fed has got it wrong.”
“The long-term question is if we could we get monetary-induced inflation? Will quantitative easing lead to a new paradigm? I don’t know about that, it is very foggy out there.”
He said higher inflation could leave Magellan’s exposure to US utilities at risk as people could place bets against them but he personally thought they had an “incredible growth story”. Utilities and consumer staples made up almost half of the fund’s portfolio and Douglass said it was an area out of favour with other investors.
“We think the portfolio has a very high probability of being resilient. In a rising bond environment, utilities won’t do much but if there is a market shock then they could go up.
“We could try to take advantage of a market shock, there are enough warning signs out there but we don’t think it is a near-term certainty.”
The Magellan Global fund had lost 6.9% over one year to 31 January, 2021, according to FE Analytics, versus returns of 3.1% by the global equity sector within the Australian Core Strategies universe.
Performance of Magellan Global versus global equity sector over one year to 31 January 2021