James
Gard:
We’re
here
at
the
Morningstar
Investment
Conference.
I’m
delighted
to
have
with
me
Ariel
Bezalel.
He
is
a
fixed
income
fund
manager
for
Jupiter.
Welcome.
So,
with
great
timing,
the
Fed
is
about
to
announce
its
interest
rate
decision
tonight.
You’re
slightly
more
dovish
than
some
in
the
market
in
terms
of
where
you
expect
the
Fed
to
be
positioned
this
year.
Can
you
just
give
us
an
idea
of
how
that
affects
your
positioning
and
what
scenarios
in
terms
of
returns
you’d
expect?
Ariel
Bezalel:
Yeah,
absolutely.
So,
back
end
of
last
year,
we
had,
what
we
called,
the
Powell
Pivot.
We
had
quite
a
dovish
pivot
by
Jerome
Powell.
We’ve
come
into
this
year,
and
at
one
point,
we’re
expecting
something
like
six
to
seven
rate
cuts.
And
due
to
the
strength
of
economic
data
combined
with
sticky
inflation
pressures,
the
Federal
Reserve
has
really
backtracked
and
guided
markets
to
expecting
rates
to
remain
higher
for
longer.
So,
now
we’ve
got
only
one
rate
cut
priced
in
and
that’s
not
until
December
of
this
year.
I
beg
to
differ.
I
think
near
term,
the
Fed
are
a
bit
rabbit
in
the
headlights.
They’re
very
confused
about
what’s
going
on.
But
I
believe
that
monetary
policy
is
acting
as
a
drag
on
real
economic
growth.
We
are
seeing
quite
a
divergence,
for
example,
between
the
soft
data
and
the
hard
data.
The
soft
data
is
telling
you
that
the
economy
is
slowing
down.
The
hard
data
is
still
painting
a
fairly
robust
picture
of
the
economy.
But
nevertheless,
we
are
seeing
a
lot
of
little
cracks
within
the
economy.
For
example,
deterioration
in
commercial
real
estate.
We’re
seeing
things
like
restaurant
sales
tailing
off,
hotel
sales
–
occupancy
rates
tailing
off.
We’re
also
seeing
a
lot
of
leading
indicators
telling
us
that
the
labour
market
has
seen
its
best
days
and
a
US
consumer
that’s
now
looking
really
stretched.
And
the
US
consumer
is
70%
of
GDP.
So,
I
think
over
the
course
of
this
year,
we’re
likely
to
see
the
slowdown
unfold
probably
in
America.
I
think
that
will
probably
lead
to
the
Fed
having
to
revisit
the
more
hawkish
policy
that
they’ve
adopted
lately.
Gard:
Sure.
So,
that
opens
the
door
for
rate
cuts,
and
more
than
the
market
is
expecting.
Moving
closer
to
home,
you
think
UK
gilts
are
attractive
for
the
similar
reasons
in
that
inflation
is
fairly
done
in
the
UK
and
Bank
of
England
is
in
a
better
position
than
the
market
might
think
in
terms
of
rate
cuts?
Bezalel:
Yes,
same
picture
really.
We’re
seeing
the
UK
economy
really
stagnating
now.
We’re
beginning
to
see
the
labour
market
really
start
to
normalise.
Job
vacancies
have
been
rolling
over.
On
top
of
that,
retail
sales
have
been
pretty
sluggish.
We
had
in
the
last
few
days,
we’ve
seen
the
British
Retail
Consortium
talking
about
goods
deflation,
which
is
really
interesting.
I
think
in
the
coming
months,
we’re
going
to
see
inflation
in
the
UK
really
come
off
and
actually
pave
the
way
for
around
the
middle
of
this
year
for
the
Bank
of
England
to
begin
that
rate
cutting
cycle.
What
I
would
also
throw
into
the
mix
is
what
we’re
seeing
globally
is
money
supply
growth
has
already
ground
to
a
halt.
We
think
that
kind
of
mountain
of
excess
liquidity
that
was
built
up
over
the
last
two
to
three
years
is
really
now
evaporating
and
that
should
help
to
bring
inflation
down
as
well.
Gard:
Sure.
You
talked
about
the
global
economy
being
chronically
indebted.
That’s
maybe
not
great
for
consumers
or
governments,
but
maybe
makes
it
easier
for
bond
managers
or…?
Bezalel:
Yeah.
I
mean,
the
way
we
think
about
debt
is,
firstly,
you’ve
got
to
think
about
all
those
cash
flows
that
are
being
diverted
from
doing
productive
things,
so
basically
simply
paying
interest
with
it.
On
top
of
that,
you’re
seeing
governments
in
Europe,
in
America,
taking
a
bigger,
bigger
share
of
GDP.
That’s
bad
for
economic
growth.
Governments
do
not
know
how
to
allocate
capital
efficiently.
Therefore,
that
has
a
bit
of
a
–
it
acts
like
a
heavy
weight
on
economic
growth
longer
term.
Debt
in
general
is
very
pernicious
for
economic
growth.
All
this
debt,
we’re
building
up
at
the
government
level,
at
the
private
sector
level
inevitably
means
lower
and
lower
economic
activity
going
forward.
It’s
very
deflationary.
Gard:
Sure.
Yeah.
But
that
helps
with
the
lowering
interest
rate
argument.
Bezalel:
Spot
on.
Inevitably,
we
think
this
heavy
debt
load
acts
as
a
heavy
hand
on
economic
growth,
helps
to
slow
down
inflation
eventually
and
then
paves
the
way
for
central
banks
to
start
cutting
rates.
Gard:
Sure.
That’s
good
news
for
homeowners,
I
guess.
Moving
on
to
corporate
bonds,
high-yields
you
were
saying
in
your
presentation
that
you
have
one
of
the
lowest
exposes
to
high-yield
corporate
bonds
you
have
for
a
while,
but
you
still
like
the
corporate
bond
investment-grade
sector.
Bezalel:
Yeah.
So,
if
you
look
at
Europe,
for
example,
if
you
Excel
10%
of
the
widest
trading
credits,
so
you’re
looking
at
the
core
part
of
the
high
yield
market
in
Europe
is
basically
trading
one
of
the
types
at
about
300
over.
The
overall
market
today
in
Europe
trades
at
around
about
400
over.
You
go
back
to
2000,
average
spreads
have
been
around
about
600
over.
So,
we’re
trading
well
through
the
averages,
and
so
we’re
not
really
getting
much
in
the
way
of
a
compensation
for
a
slowdown
and
perhaps
a
recession
in
the
European
and
the
US
economy.
So,
high
yield,
I
think
one
should
treat
with
caution.
Returns
year-to-date
in
high
yield
have
actually
been
in
line
with
cash,
fairly
lacklustre.
Investment-grade
returns
are
year-to-date
around
about
0.5%.
So
again,
it’s
been
a
bit
disappointing
for
a
lot
of
investors
who’ve
been
piling
into
investment-grade.
And
so,
with
the
lack
of
compensation
we’re
getting,
we
think
we
should
be
looking
at
credit
as
a
source
of
carry.
So
therefore,
we’ve
been
diverting
a
lot
of
our
exposure
to
credit
to
much
more
defensive
sectors,
short-dated
paper,
a
bias
towards
senior
secured
paper.
And
so,
we’re
looking
at
as
a
source
of
carry
to
the
portfolio
rather
than
a
place
where
we’re
going
to
generate
big
capital
gains.
Gard:
So,
it’s
kind
of
you
are
worried
about
default
risk
and
I
think
with
a
slowing
in
economy
and
indebted
consumer
default
risk
seems
like
a
logical…
Bezalel:
There’s
absolutely
that
factor.
And
the
other
thing
you’ve
got
to
bear
in
mind
is,
is
that
a
lot
of
companies
now
that
are
refinancing
debts
are
having
to
refinance
at
a
much,
much
higher
interest
rate.
So,
you’re
seeing
a
lot
of
those
old
coupons
going
from
the
high
yield
space,
4%,
5%,
6%
to
double-digits-plus
in
a
lot
of
cases.
And
that’s
sucking
out
a
lot
of
cash
flow
and
inevitably
puts
a
lot
of
companies
on
the
brink.
Gard:
Yeah.
That
makes
sense.
So
just
as
a
final
question,
you
mentioned
this
has
been
the
kind
of
hardest
period
in
your
career
to
manage
money.
Can
you
elaborate
on
that?
Bezalel:
Yeah,
absolutely.
I
think
really
the
response
to
that
is,
is
because
we
have
so
much
economic
and
geopolitical
uncertainty.
We
saw
this
massive
fiscal
response,
this
huge
inflationary
surge
over
’21
and
’22.
And
central
banks
wanting
to
put
inflation
back
in
the
genie.
And
that’s
created
a
lot
of
volatility
in
bond
markets.
But
also,
on
top
of
that,
it’s
really
hard
to
judge
when
–
we
found
it
very
difficult
to
know
versus
previous
economic
cycles
when
the
turn
is
happening,
it’s
really
difficult
to
call
because
of
that
kind
of
excess
liquidity
we
have
in
the
system.
The
other
thing
I
would
highlight,
I
think
what
we’ve
been
surprised
about
has
been
the
resilience
of
the
US
consumer.
The
US
consumer
over
the
last
two,
three
years
has
been
parting
like
it’s
1999.
They’ve
been
flush
with
all
these
stimulus
checks.
And
historically,
whenever
they
did
get
these
stimulus
checks,
they
would
spend
half
and
save
half.
This
time
round,
they’ve
gone
out
and
spent
a
lot.
And
that’s
been
a
hard
thing
to
call
is
when
that
consumer
spending
tails
off.
Gard:
Sure.
But
you
think
that
we’re
at
a
pivot
point.
Bezalel:
But
I
think
we’re
now
at
a
pivot
point.
Looking
at
all
the
numbers
we’re
seeing,
we’re
seeing
credit
card
delinquencies
are
on
the
rise.
We’re
seeing
auto
loan
delinquencies
are
on
the
rise.
Commercial
real
estate
loan
souring.
So,
a
lot
of
telltale
signs
now
that
consumers
and
businesses
are
beginning
to
get
a
bit
tapped
down.
We
also
saw
a
piece
the
other
day
showing
that
a
bit
over
40%
of
smaller
businesses
are
struggling
to
pay
their
rents.
So
that’s
huge.
So,
a
lot
of
these
kind
of
anecdotal
stuff
we’re
paying
attention
to
because
inevitably
it
melts
into
something
quite
big.
Gard:
Yeah.
Anyway,
it’s
going
to
be
an
interesting
year
for
lots
of
reasons.
But
thanks
very
much
for
your
insights,
Ariel.
Bezalel:
Yeah,
it’s
been
a
pleasure.
Thank
you.
Gard:
Yeah.
Thank
you.
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