The factor you should be focusing on to understand what markets do next

Note: This interview was taped on Tuesday 28 August 2024.

After 26 years in markets, Janus Henderson Investors’ Jay Sivapalan has come to expect the unexpected.

“Despite how good your analysis is, how much work you do, how much due diligence you do, and how much judgement you face, markets and the world can have a different plan for you’ says Sivapalan.

He adds that having a plan B, C and D are critical and that downturns and crises are part of the course of markets.

So, where are we now?

While Sivapalan is open to possibilities, right now he sees markets as being in “quite a mature phase of the economic cycle”, which means that global growth is slowing “by design – by the intention of central banks".

Policy is working as it should and even though there are some similarities with past cycles, there are also some key differences according to Sivapalan.

“We hadn't seen an inflation pulse, like what we went through in the last couple of years, since the late seventies and early eighties. So that's different”, says Sivapalan.

He adds that the pandemic itself was quite unique, while global trade and how the US interacts with China is also very different.

In terms of what happens next, Sivapalan expects both the domestic and global economies to slow.

“That naturally will slow consumption. It will slacken up the labour market, make it a bit easier to access labour. On the corporate side, we will start to see some moderate defaults and a default cycle starting to form.

So from our perspective, when we think about markets, we don't think of markets as irrationally priced, but possibly a little bit complacent”, says Sivapalan.

Focus on the labour market, and the direction of travel

To assess conditions and help understand what could happen next, Sivapalan is now focused on the labour market, rather than inflation. Unemployment is a lagging indicator, but many leading indicators of the labour market have already turned down, both here and abroad, notes Sivapalan.

He adds that central banks can and often do ease monetary policy before inflation is back within target bands, as weak demand will naturally address inflation. But at the detriment of labour markets. And the RBA will respond to this by commencing an easing cycle.

“For us, inflation was really a 2022, 2023 story”, says Sivapalan.

“What we really need to be focusing on from here on is the labour market and the forward indicators are definitely showing pockets of weakness”, says Sivapalan.

The other point of order for Sivapalan is the often narrow focus on what the RBA or other central banks might do next month or even in the next three months.

“What's really important for fixed interest investors and what ultimately drives returns is more the total quantum and direction of travel of cash rate settings, as opposed to which month that they might be cutting or raising rates”, says Sivapalan.

He adds that all of the ECB, Bank of Canada, and Bank of New Zealand have already cut rates, with the Fed likely to follow soon, and that Australians will likely see a cut some time in the next six to nine months.

But, as noted above, it’s less about the when and more about what that easing policy looks like.

“Is it a hundred basis points of easing? Is it 200 basis points of easing?” asks Sivapalan, adding that he believes what we will find “is that as the labour market deteriorates, the Reserve Bank's own rhetoric will change very quickly from really focusing on inflation, which is all they talk about today, to something very different”.

Watch the video

To find out more about how Janus Henderson is investing via the Australian Fixed Interest Fund – which is celebrating its 30th birthday – make sure to watch the video. Sivapalan shares why there is more to the story than just yield, and one big opportunity that I’ve not heard other fixed interest investors talk about. 

Timestamps

• 0:00 - Introduction
• 0:19 - Happy 30th birthday - what have you learned over the journey?
  
• 1:30 - A question of endurance
  
• 3:14 - Markets right now
  
• 4:44 - Focus on Australia
  
• 6:10 - The path of interest rates and what really matters
  
• 7:46 - Cutting cycle: Deep or shallow
• 8:40 - Default risks and the nuance therein
  
• 11:09 - Things are getting interesting - it's time to get into shape
  
• 13:16 - Duration and when it matters most
  
• 14:52 - The biggest risk over the next 12 months
  
• 16:57 - Jay's View from the Top

Learn more

Jay has a fundamentally driven approach, seeking to take advantage of situations where market pricing has become misaligned with economic and investment fundamentals. To find out more, visit the Janus Henderson website or the fund profile below. 

Managed Fund

Janus Henderson Australian Fixed Interest Fund

Australian Fixed Income

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