Hedge Fund Pares Stocks as Others Retreat in Violent Market Rout

(Bloomberg) -- As Asia was jolted awake to a violent sell-off in global markets, some money managers are girding for more carnage.

The head of Australian money manager Magellan Financial Group Ltd. warned that the current bout of selling may be just a warm-up compared with what’s coming in an environment of rising inflation. One of the world’s top-performing macro hedge funds, Asia’s PruLev Global Macro Fund, is actively managing risk after starting to pare down stocks a few weeks ago. At Janus Henderson Investors in Singapore, a fund manager has boosted defensive stocks, while a Thai brokerage is asking clients to hold on to cash -- for now.

Market declines in the most recent bout of selling so far have been breathtaking, with stocks in Asia wiping out gains for the year as Japan’s Nikkei 225 Stock Average slumped into correction territory while the S&P 500 appears on its way to joining the Japanese benchmark. Bond yields have jumped on rising inflation expectations, the apparent trigger for the selloff that took many managers by surprise with its ferocity.

“I really want to understand where this ball may land about what the central banks would do,” Hamish Douglass, the chief stock picker at the Sydney-based A$59 billion ($46 billion) Magellan fund, said on a conference call. “We could have a bounce back or whatever, but until we can actually see the whites of the central banks’ eyes, and we actually see some data on inflation later this year, I think I just want to be patient and cautious here.”

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Douglass is adopting a defensive stance in the face of this mounting uncertainty, boosting cash reserves to just under 13 percent from roughly 8 percent in his core global equity strategy over the past two months.

At the $132 million PruLev fund, which advanced 52 percent last year to rank as the fifth-best macro performer globally, the managers have become more conservative in allocating risk and will be “vigilant against complacency” in coming months. Still, even after the “massive correction,” fundamentals haven’t changed that much, Deputy Fund Manager August Li said in an email Tuesday.

“To put in perspective, the correction that we have seen so far is a result of markets being weaned from cheaper capital to more realistically priced capital,” Li said.

For others, the moves lower are more alarming -- and the overhang of monetary policy risk still underestimated.

“The market is underpricing the inflation risk,” said Manish Tibrewal, CEO family office at Tolaram Group. The office manages $500 million in assets. “There could be a shock to the financial markets if the inflation data is much higher than what the markets are pricing.”

With rates moving higher, the dollar will strengthen against all major currencies once the U.S. debt ceiling issue is resolved, Tibrewal said. He also prefers stocks over growth and the euro zone over U.S., particularly European financials poised to benefit from the end of quantitative easing.

Sat Duhra, a fund manager at Janus Henderson Investors in Singapore, is also deploying a more defensive position after reducing his positions in Samsung Electronics Co. leading up to the selloff and adding Chinese bank stocks.

The market has “got ahead of itself” and there’s been a frustrating disconnect between fundamentals and equity valuations, he said. Investors should focus on free cash flow-generating companies with yield, which will better protect capital in this period, he said.

Kept awake

Win Udomrachtavanich, Chairman of Ktb Securities (Thailand) Co., said in a phone interview from Japan where he was on holiday but overnight moves in the U.S. kept him awake. He’s advising clients to hold onto their cash now, until the market stabilizes and bargain opportunities present themselves. The firm had already told its clients to sell all of their U.S. equities last year as they had gotten too expensive, he said.

Other managers urged calm, with James Bateman, chief investment officer for multi-asset at Fidelity International saying the pullback is actually healthy for the market.

“The current price action may feel unusual because we have become so used to a low volatility environment, with economic data having been consistently positive across the globe in 2017.”

Some even asked investors to wait for good investment opportunities.

“The markets will be sentiment-driven and we could see some panic but investors should stay calm and if you have money set aside be ready to come in,” said John Padilla, head of equities at Metropolitan Bank & Trust Co. He is buying selectively but notes the bias among most investors is to wait for the worst to blow over first. “This is a test of nerves, but if you look through the chaos valuations have become reasonable so it’s a good opportunity for the strong-hearted.”

©2018 Bloomberg L.P.