An inverted yield curve is usually indicative of a looming recession, but Callum Abbot, manager of the JPMorgan Claverhouse Investment Trust, sought to reassure wealth managers at a Sub35 event in Shoreditch, London.
The yield on ten-year Treasuries (US government bonds) relative to the yield on two-year Treasuries has declined in recent years. Treasury yields are important because they tell us how investors feel about the economy. The higher the yields on longer-dated Treasuries, the better the economic outlook. The spread between ten- and two-year notes is most commonly watched because it is where the market prices the Federal Reserve’s anticipated interest rates moves.
“The gap between that inverting and actual recession can be anywhere up to 36 months, so if it does finally tick below zero, I wouldn’t suddenly panic,” said Abbot. “It doesn’t mean the end of the world is going to happen tomorrow; it just means a pretty bad headline and a bit of volatility.”
The end of the economic cycle is a hot topic as the Fed raises interest rates, the US-China trade war intensifies and US companies report weaker earnings. Brexit also poses a lot of uncertainty.
“Anyone who tells you they know what’s going to happen with Brexit is lying,” said Abbot. “Hopefully, we’ll get a good outcome, but people are not rational or logical. I work on a behavioural finance desk – the whole point is that the market isn’t rational; people make stupid decisions. We could have an emotional hard Brexit.”
Dividend hero
Investment trusts that aim to generate an income can help investors to ride out such uncertainty and the ups and downs of stock markets.
The ability to hold back some income to pay out in leaner times enables trusts like JP Morgan Claverhouse to smooth the income they pay to investors – and keep it rising year-on-year. It has one of the longest track records of growing its dividends and is one of the Association of Investment Companies’ ‘dividend heroes’ with a 45-year run of increases – “since before a lot of us were born”, said Abbot.
The trust has revenue reserves that amount to 1.2 years’ dividends at the current rate – higher than many of its peers in the UK equity income sector.
“If there were no dividends paid in 2019, we would still be able to pay a growing dividend,” he said. “If we are at the end of the cycle, which I don’t necessarily think we are, you can reassure your investors that, if they have school fees to pay at the end of the year, we can help them by giving them a good income stream that’s growing.”