Jupiter’s Philip Gibbs has opened up a net short position on “overvalued” UK commercial property stocks as the manager develops a number of early themes into his new Absolute Return fund.
Gibbs says he is currently running a reasonable balance between long and short investments, with particular concerns on government bonds.
The manager warns sovereign debt could decline as investors weigh up the relatively low yields available on these bonds with the financing problems many governments face.
Gibbs believes these difficulties could be significantly negative for markets as a whole.
On this theme, the manager has opened up an early short on Japanese debt.
“I am actually short of Japanese government bonds, because the Japanese outlook has been downgraded to negative,” he says.
“The debt to GDP ratio is very, very high and the 10-year bond-only yields 1.3% so it looks like a fairly safe short.”
In the UK, Gibbs is cautious on commercial property stocks.
“They trade at premiums to NAV, although I think the outlook for the UK economy is pretty uninspiring at best, with very sluggish growth and big concerns over government finances,” he says.
He is also negative on Spanish banks, on the belief the country’s property bubble is deflating.
In addition, Gibbs says he has “significant exposure” to currencies outside sterling, saying the UK economy looks particularly vulnerable – given the economic and political uncertainty.
On the long side, Gibbs is positive on Chinese banks and Hong Kong property companies, expecting growth to be strong in China despite expectations of a continued tightening of monetary policy.
He also favours Norway, on the belief it is a “very strong country with very good government finances”.
Gibbs also has some exposure to corporate bonds at high yields of 7% or 8%, while he initiated a small long position on gold.
“I believe gold plays to both the strength in emerging market economies and also the concerns about Western economies,” Gibbs adds.
The manager says as current market conditions are difficult to interpret, he is running “enormous liquidity” in the Absolute Return portfolio.
“I could probably realise the whole portfolio within a day if I wished to,” Gibbs says. “That is not always going to be the case but it is an indication of the type of liquidity I am focused on.”
Gibbs says the launch of his Absolute Return portfolio has come at a pivotal time, as
he expects volatility to continue to be fairly extreme in the near term.
“On the one hand, there is some strong growth going on in emerging markets, and there are some low valuations of shares relative to bonds, historically low,” he adds.
“But on the other hand, we are into a period where governments are taking away some of the stimulus measures.
“For example, in China and Australia, interest rates are being increased. In the Western world, governments and the central banks would love to increase interest rates if they could, if they felt there was the opportunity.
“In order to address government budget deficits, taxes are going to have to be put up in some cases and public spending is obviously going to have to be cut. And those things will in themselves be negative for the economy.”
