In a monthly update, the firm said a trade war could reduce US growth by up to 0.5% annually and that US inflation would be contained around 2% for the next few years.
Managed by Steve Goldman, Raymond Lee and Dan Siluk, the fund had 11% allocated to North America, its joint second-highest weighting with Asia ex Japan.
They said they believed the US trade war with China would have far more of a political impact than an economic one and highlighted there was ‘little political incentive’ for a solution to be reached between the two countries.
“We remain confused by market reactions to random Trump trade war tweets. We’re general believers in lower US rates as the trade war will remain unresolved, despite the Phase 1 deal. However, we view the trade war as a political game rather than economic story and don’t place a high conviction/information ratio on lower rates/longer duration.”
The ‘Phase 1’ deal was reached in December, 2019 and saw China agree to buy US$200 billion of products and services from the US over the next two years. In exchange, the US agreed to reduce tariffs on $120 billion of Chinese products from 15% to 7.5%.
Performance of S&P 500 and Shanghai Composite index over one year to 31 January, 2020.
“We see economic policy gridlock given split Congress. Policy progress is unlikely until the November elections and prospects for major infrastructure spending, or tax and healthcare policy adjustments limited. Trade policy is also likely to remain unchanged with continuing trade war rhetoric, albeit with little political incentive for a solution, leading to a long, drawn-out saga with no near-term resolution.”
Meanwhile, the fund was still avoiding the UK, a position it had taken for more than three years, given the ongoing uncertainty caused by Brexit and the UK’s political situation.
“We have mainly avoided UK positions since the 2016 Brexit vote, having little insight into the political decisions that will ultimately drive economic performance. We had been sceptical over the leadership’s ability to deliver a workable Brexit solution, despite the 31 January withdrawal,” the managers said.
The Kapstream Absolute Return Income fund returned 3.7% over one year to 31 January, 2020, according to FE Analytics, versus returns of 8.2% by the ACS Absolute Return sector.
Performance of Kapstream Absolute Return Income fund and ACS Absolute Return sector over one year to 31 January, 2020
