Strategic Global Bond Fund

Key points

• The fund has a “sophisticated” UCITS III structure and risk management processes
• Sector: IMA Global Bonds

Current views

Across global financial markets, December was marked by the breakdown of a number of correlations, with bond yields trading much lower than equities would indicate and the USD index more in line with bonds than either equities or oil prices. The opposing forces in the eurozone of systemic risks and an easy money policy response continue to rage with the political overtones making markets very skittish.

The major political event of the month was the Eurogroup summit which fell short of concrete actions for bolstering IMF/EU backstops in the near term and of clarifying the ultimate goal of fiscal union for the eurozone. In turn, Italian and Spanish bond spreads vs. Germany widened in the wake of this disappointment. While enhanced fiscal discipline was a step in the right direction, this paved the way for the ECB to extend liquidity support to banks rather than to signal an open-ended programme of government bond purchases, which had been broadly expected by markets. In addition to ECB instigated another 25 bps cut, as economic activity measures provided a green light.

In the US, the housing sector showed tentative signs of bottoming and consumer confidence staged an improvement, suggesting the US economy has escaped contamination from the eurozone so far. The fact that the US banking sector was not showing signs of stress in contrast to European banks bolstered the attraction of the USD as a safe haven, with some credit revival to the private sector.A few indicators also pointed to some revival of residential construction although it was too early to detect a trend. Despite soft income growth, consumer spending was resilient at the end of 2011, consistent with better sentiment and improved job prospects.

In the UK, the rebalancing of the economy through exports as reflected in external trade data looked unlikely to be sustained given weak prospects for the eurozone and domestic demand showing renewed weakness, reflecting fiscal tightening and rising unemployment. New lows were reached by gilt yields as a result driven by recession fears and continued BoE buying.

In Asia, economic activity lost further momentum whereas inflation pressures eased in many countries. While the pace of the slowdown in China seemed to stabilise as reflected in the PMI data for the manufacturing sector, external headwinds, a smaller trade and current account surplus and a big drop in headline inflation highlighted that the scope for CNY appreciation had been reduced.

The economic outlook remains precarious in many parts of the developed world with several parts of the emerging world slowing significantly. Whether this morphs into a global recession or a soft patch is yet to be seen but most importantly, both bond yields and equity markets have discounted a substantial amount of this outlook (if not all) with yields at near all-time lows in some cases and equity valuations generally cheap.

On 1st January 2012 City Financial appointed Graham Glass as the fund manager.