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The Asset Class: Jason Borbora-Sheen · Strictly Business

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  You're listening to Strictly Business Podcast with Lindsay Williams.
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  A number of central banks are meeting in the next few days to set their domestic
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  monetary policies.
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  With me now is Jason Borbersheen, Portfolio Manager at 91 in London.
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  Jason, we've got the US Federal Reserve, the ECB, Bank of England and Bank of Japan
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  notably,
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  and they're all sort of facing differing domestic problems, but one very impactful
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  common problem.
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  is right out there.
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  It's the war on Iran.
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  So it's very tricky times for our central bankers as they prepare to huddle.
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  Absolutely, yes.
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  I mean, I think this is now a little bit of a theme for the world's central banks
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  over the 2021 through to 26
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  period, which is that as soon as they appear to have themselves on track for a
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  course,
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  something geopolitical or otherwise comes out of the woodwork and steers them away
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  from it.
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  Yeah, maybe we should be...
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  methodical and start with the biggest central bank, and that's the US Federal
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  Reserve.
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  Now, if you look at the factors that they've got to look at, I mean, just the
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  ones in the headlines, potential US jobs recession,
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  some people say it's already a recession, growth suddenly not quite as good as Mr.
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  Trump wants, inflation is under control, but maybe not for long because it's likely
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  to spike as energy prices soar.
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  So all these things in the mix, and it looks suddenly as though they might not
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  cut rates.
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  as frequently as people want in 2026.
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  So let's take it through that lens of the growth and inflation mix that's required
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  for the
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  Federal Reserve or most other central banks to feel inclined to act in either
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  direction, so either to tighten or to ease policy.
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  Prior to the Iranian conflict,
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  I think there was a mosaic of factors in place which was prompting the Fed's
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  pricing of future rate
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  actions to be much more easy.
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  And it's slightly technical,
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  but what we were seeing in the pricing of interest rates by markets was an
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  expectation that the Federal Reserve
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  were not necessarily imminently going to act, by that I mean in 2026,
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  but were starting to be priced to act from 2027 and onwards to be much more
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  facilitative of easy policy.
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  And that appeared to coincide with the rise of concerns around unemployment.
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  from AI in the future.
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  And so there was a dynamic underway in which essentially inflation data was
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  appearing fairly benign.
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  Perhaps the strongest of the disinflationary impulses was coming to an
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  end as some of the most recent data
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  has been showing, but still allowing the Fed perhaps to ease.
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  There was this concern around the jobs market, maybe not occurring in the
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  immediate near term,
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  but occurring at some point over the next couple of years that all conspired to mean
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  that the Fed was being
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  priced to go more easy.
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  And this was then reflecting in bond yields towards the end of February,
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  falling and declining by quite a meaningful amount.
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  That has reversed significantly.
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  Partly, it's now the idea that actually the future rate cuts were being taken out
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  and the near term, actually,
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  some probability of a potential hike needs to go in there.
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  That's not to say that there is a hike priced, but Markets are continuously
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  trying to price the distribution of probabilities.
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  And it's that distribution which has meaningfully changed with the Iranian
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  conflict.
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  And it sets the backdrop for all of the world's central banks.
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  There's a lot of people that might say that this is just a brief moment in time.
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  You know, as Mr.
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  Trump says, it's just an excursion.
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  And Israel has said, well, maybe it's another three weeks.
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  Maybe it's less, according to the U.S.
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  administration.
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  So all sorts of ideas out there.
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  you the potential spike in inflation might be just that, a moment in time,
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  and the central bank might just look through that.
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  And also, of course, we've got the change of personnel right at the top.
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  Do either of those factors come into the equation as well, Jason?
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  Yes, I think there's two parts to that question, Len.
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  There's the first of whether this will prove transitory and at the risk of
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  looking too
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  far through what is a very difficult situation.
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  I would think that the paradigm of the past,
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  whereby most of the conflicts resolve themselves and therefore do show up as a
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  bump rather than a protracted
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  hill, is the base case.
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  But the difficulty then is the willingness of the central banks to adopt that
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  approach.
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  And the experience from 2022's Russia-Ukraine conflict has, I think,
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  changed the mindset,
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  certainly for a bank like the European Central Bank, quite meaningfully.
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  and it led to a review of their policymaking stance and the need to be a
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  bit more proactive rather than reactive, i.e.
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  don't be willing to think of things as transitory and try to look to react to
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  them.
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  And the most recent speak out of the ECB confirmed some willingness actually to
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  tighten policy,
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  despite the fact that.
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  Employment data in, for example, Europe is looking much worse.
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  So I think there is perhaps this risk that the World Central Bank's proved more
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  reactive,
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  but I do think that's going to vary bank by bank.
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  I think, for example, in the UK, there is a much weaker employment situation than
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  there was in 2022,
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  and growth is not showing signs of meaningful re-acceleration prior to this
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  conflict arising,
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  and therefore there's much less willingness to hike in that sort of
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  country.
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  So we're going to get a different reaction function from different banks, despite
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  that common driving factor.
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  What about, as I said, the change of personnel at the Fed?
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  Is he going to be under pressure, the new Fed chair, politically to cut rates?
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  Mr.
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  Trump, again, has been very vociferous, actually, about slashing rates straight
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  away, maybe because of the war,
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  maybe because of the war's effect on U.S. growth.
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  What do you think about that?
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  I think clearly anyone selected by the US.
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  administration, given the focus that they've had on the desire for lower rates,
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  would likely be inclined to think that way.
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  It would be very surprising to find that Mr Walsh doesn't believe that rates should
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  be lowered.
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  However, you are dealing with an institution which is very robust,
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  you would need to remove the remainder of the committee.
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  And a lot of the speak more recently from the Fed has been on the more hawkish side.
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  So I think that even if he is that way inclined,
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  If the mix of factors in the backdrop is not facilitative of lower rates, that
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  won't be the approach that the
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  Federal Reserve will take, or even if they do, it would only be a one-off action
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  that's then needing to be reversed.
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  So it, to me, suggests that ultimately the Fed is still a very robust institution,
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  that it can't be strong-armed by one individual, and that actually the mix of
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  factors is going to be the determinant for them,
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  and that's become less likely of easing in the immediate time.
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  What about going around the corner from your office to the Bank of England?
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  How does the Bank of England look at the situation?
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  There's a lot of interesting politics in the background, but they can try and shut
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  themselves away from that.
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  What are they going to do?
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  I think the difficulty for the bank is that ultimately in the UK there is a heavy
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  reliance on gas prices and
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  they are in a less beneficial situation than they were at the start of the year.
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  At the start of the year it seemed that the mix of factors for the bank to go
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  towards easing were very strong.
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  So lots of employment data looking like the country needed a bit more support.
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  Inflation data was broadly coming more in line with where the bank would have wanted
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  to see it to be to ease,
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  although not moving there very quickly.
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  And then they've had this shock move from energy prices.
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  Then there's going to be some reaction through government policies, we've heard,
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  to try and cap the impact of that on individuals.
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  But I think nevertheless, it may cloud the outlook in the short term.
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  But where the markets probably got it wrong is pricing the idea that the bank is
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  going to need to hike rates.
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  I think the bank is showing themselves as very willing to wait to respond.
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  I think that's where they'll put themselves in this current meeting, but
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  their desire, their inclination is towards easing policy.
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  So I think that gets taken out and then the bank actually goes back towards an
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  easing stance as and when the conflict seems to
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  resolve itself or as markets become perhaps more comfortable with which
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  dynamics actually matter.
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  from this conflict and how they're going to feed through in terms of the balance of
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  inflation and growth.
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  And that's one of the big, I think, dynamics that's been notable since the
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  start of the conflict is that interest
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  rate markets and bond markets have spent a lot of time repricing the inflationary
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  impact of the conflict.
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  Little is priced from a negative growth perspective.
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  And actually, a lot of other risk assets have failed to look at the inflation or
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  the growth impacts at all.
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  In some ways, it's been quite benign so far.
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  So there is, I think,
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  that scope for rate pricing to come back in as and when the conflicts end seem more
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  palpable.
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  How much do the central bankers look at the markets?
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  I mean, I'm talking about the currency markets at the moment.
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  You look at the dollar index, it's above 100 as we speak to each other.
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  And you've got the euro dollar going from broadly 119 down to around 114.
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  That must have an influence, Jason.
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  Absolutely.
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  No, I think they look very closely at all kind of asset markets and there's vast
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  amounts
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  of evidence from the empirical to the narrative base that they are doing that.
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  I think that the currency move probably doesn't impact them enormously currently.
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  I think what probably does cause the attention to be picked a little more is
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  the move in rate expectations.
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  So central bankers tend to be aware of what is priced and expected of them from
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  rates markets as they go into
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  meetings.
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  And unless there's a strong desire to push against the future pricing,
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  they tend not to want to surprise that narrative enormously.
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  And so that is probably going to be the thing that's more front of mind.
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  I think the currency moves, they're possibly disinflationary for the US in the
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  medium term.
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  They may be slightly more inflationary for Europe.
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  in the short to medium term, given that the euro has been depreciating throughout
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  this crisis.
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  But if you stand back over the last year or so,
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  we have been in this very significant dollar depreciation dynamic since
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  Liberation Day.
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  And so that's probably the more impactful backdrop than the shorter run moves we've
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  had.
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  What about portfolio managers?
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  We're talking a lot about central bankers, but portfolio managers like yourself must
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  be looking with a great deal of interest
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  to what's going to happen over the next few days.
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  Have you started to tweak a little bit ahead of the meetings?
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  In all honesty, not really.
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  So I think the interesting thing about the conflict so far is that the reaction from
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  a lot of asset markets has been
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  fairly benign.
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  So the intraday action can be incredibly volatile.
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  But the end of day or day to day has actually not been so dramatic.
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  So we have some asset classes down, you know, mid single digits or less.
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  If we look at the S&P for the year.
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  We have US treasuries and global government bond markets roughly flat for
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  the year in total return terms.
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  And so sentiment is, I think, quite depressed when we look at various measures
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  of survey.
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  But there's this detachment from the level of pessimism to the price levels,
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  where normally when you have this sort of degree of geopolitical shock and you have
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  this degree of negative sentiment appearing in those surveys,
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  you'd have suffered or seen a much more meaningful drawdown.
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  Certainly on risk assets.
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  And so back to that previous point that some assets such as rates markets are
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  reacting more than others, such as equities,
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  it's quite a divergent place that's ended with not very much actually happening.
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  So we've undone some of the cuts that were priced for the Fed in the first couple of
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  months,
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  but it hasn't led to a much more meaningful repricing of treasuries.
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  And we've seen risk assets hit the headlines, but not actually get hit very
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  hard on price terms.
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  So the things that we have been doing...
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  leaning back into some of those assets where it feels disproportionate in terms
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  of the pricing.
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  So we mentioned things like the gilt market, where this expectation that the
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  bank will actually start to hike rates,
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  we think it's unlikely that they do that.
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  And therefore, there is that asymmetry in those assets.
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  But more broadly, it's not yet a series of markets where you're seeing massive
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  pessimism or euphoria being priced.
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  Jason, thanks so much for your insight.
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  Jason Borber-Sheen is a portfolio manager at 91 in London.
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  The views and opinions expressed in these podcasts are those of Lindsay Williams and
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• 12:52
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