00:00I just want to start with this potential Fed chair announcement and potentially some implications from where you sit.
00:07What is it that you're watching for? Are you invested into potentially who this next Fed chair will be?
00:15Thank you for having me this morning, Jennifer.
00:18I think, you know, it's difficult to speculate on some of the changes that we're coming up with, the changes in the Fed chair.
00:25But we ultimately think it won't make too much of a difference in terms of the balance on the FOMC.
00:31We think some of the aspects that actually may be quite key is perhaps is the Fed chair Powell stays on the board.
00:37And also the decision from the Supreme Court around Lisa Cook as well.
00:41That can potentially have some changes in terms of the balance on the FOMC in terms of how dovish or how hawkish the committee is.
00:48But in terms of who the individual is, we don't think that necessarily makes a big change at this particular point.
00:53Let's go across the Atlantic, though, Rufaro, and talk about the Bank of England, because that is the big story for today.
01:02What is your expectation for how this might unfold?
01:06We are expecting a cut, but I wonder what in the details are you going to be watching closely for?
01:12I think we agree with the market sentiment currently that we're expecting a 25 basis point cut today.
01:19We think the last two sets of data since the November meeting are really in support of that.
01:23So we think Governor Bailey will swing over to favour a cut.
01:27So our base case is a 5-4 split.
01:29But what the markets might be looking for, absent a press conference in this instance, is perhaps how that vote split will be.
01:35If it swings a little bit more dovish, it might be an indication to the market that the committee is now shifting to a more dovish stance.
01:42And ultimately, it's also some of those comments we'll get from the MPC committee members that we'll see in the minutes that will also be helpful for markets to see in terms of just what the sentiment is within the central bank.
01:53What about the sentiment, Rufaro, as far as the economy goes and some of the fiscal concerns that really permeated across markets in the UK earlier this year?
02:04Do you think they're in the rear view?
02:07I'll certainly say after sort of a series of press leaks and everything else that was sort of surrounding the budget,
02:15I think we're sort of at that point now where some of the fiscal concerns are now in the rear view mirror.
02:19We now have a higher fiscal headroom, which is positive for markets.
02:22When we also look at the key factor which gilt markets would be concerned about is in terms of issuance.
02:28We now think we're past that peak in issuance.
02:30The DMO is also skewing issuance towards the shorter end, which is also positive for markets,
02:36given that that natural demand at that long end of the curve has also now started to track downwards.
02:41So we think some of those fiscal concerns are now in the rear view.
02:44And when we sort of think going forward, we actually think gilt are pretty well positioned to outperform next year.
02:50We think the Bank of England is actually going to cut rates even faster than what's currently priced in the market at the moment.
02:56We're expecting a year-end bank rate of around 3%, which is a bit more than what's currently priced in by markets.
03:02And we think against this backdrop, gilt should outperform.
03:06Do you then reposition your portfolio considering that, Rufara?
03:10So before we had the budgetary announcements, when we sort of had a good gauge of just some of those fiscal concerns starting to fade,
03:20we actually shifted our portfolios to being more overweight.
03:23Of course, there will be some volatility we're expecting to come through into gilt,
03:27not just due to what's happening in the UK, but what's happening globally in terms of with central banks.
03:34We've started to see a little bit of a shift in terms of a look out to 2027,
03:39where markets are starting to price in a little bit more hawkishly,
03:42where we're starting to see the current interest rates versus what those swap rates are in 2027 start to deviate.
03:49So a little bit of hawkish sentiment is starting to come back into the curve.
03:53So that may prove to be a little bit volatile for yields into the coming year.
03:58But also one of the other aspects that we've observed over the past five years is that when we tend to get a strong rally into year-end,
04:05sometimes that tends to reverse at the beginning of the year.
04:08And if the market starts to sell off in December, that tends to continue into January.
04:13So that's one of the key risks we're still monitoring for.
04:15But generally, in terms of over the course of 2026, we think gilt will still be sort of the top performer amongst developed markets.
04:23Rufar, I just want to broaden out quickly to Eurocredit, because I was seeing in your notes,
04:29you project an uptrend in high-yield defaults in 2026, driven by idiosyncratic factors.
04:35Can you take us into that thinking?
04:38So I think we've recently hit a peak in terms of where high-yield defaults levels have been.
04:45But we expect that to continue to trend a little bit upwards into the coming year.
04:49And that's really just due to some of those companies that may have some of those weaker fundamentals.
04:53So we don't think it's a broad sort of default scenario.
04:57And we think in this scenario, being quite active in the space and picking out some of those good companies within the high-yield space,
05:04one of the more attractive aspects about high-yield is the fact that you have a decent carry cushion there.
05:09Yes, spreads may widen out a little bit, but we think overall high-yield may actually outperform investment grade in the upcoming year.
Comments