Hedge Clippings | 10 May 2019

Dear ,

Hedge Clippings has been indulging in some R&R this week on Queensland’s Sunshine Coast, and as a result has only partially been keeping an eye on what’s happening in the real world over the rim of his glass(es). We did however note that the RBA kept rates on hold on Tuesday (we hate to say we told you so) although that doesn’t mean they’ll stay there for too much longer. What will be interesting however is to see the market’s response to next Saturday’s election – and in due course the RBA’s stance once the election is out of the way.

Whilst not being prepared to write Scott Morrison and his Liberal’s chances off quite yet, the bookies have, with the Liberal/NP coalition at $5.50 against Labour at $1.14. Whilst the various media outlets have their bias (as does Hedge Clippings), you can assume the bookies just follow the money. As Paul Keating was wont to say, "In the race of life, always back self-interest. At least you know it’s trying".

However Australian politics is an odd animal, confused as it is by preference deals with minor parties and various other nutters. What seems most likely is that neither major party will have control of the Senate, leaving whoever has a majority in the lower house either frustrated, or with a get out excuse for not delivering, or a combination of both.

So while Australia waits and watches, Donald Trump has tired of extended tedious negotiations, and upped the ante in his trade war with China, going ahead with preparations to impose 24% tariffs on a further US$325 billion in Chinese imports, and raising the prospect of all Chinese exports – about $540 billion based on last year’s numbers – being included. China’s Xi has yet to respond, but somehow we doubt he’ll simply give up the fight.

As Bloomberg reported - with some understatement – such a move would have significant repercussions for the U.S., Chinese and global economies, with their economists advising that an all-out trade war between the world’s two largest economies risked tipping the US economy into a recession by the end of 2020.

A report in the Telegraph in the UK provided the following, even before allowing for tariffs on 100% of Chinese exports to the US:

"UBS estimates global growth would be hit by about 0.45 percentage points, with a potential fall in global stock markets of close to 10pc.

The US economy is relatively closed - exports amount to less than one-tenth of its GDP. In contrast, economies across Europe are much more open and therefore likely to be more vulnerable to trade disruption.

Germany, for example, is a key customer of China, selling industrial goods to the world’s second-largest economy. As China suffers, so does Germany, and then Germany’s trading partners.

German industry has only just escaped a recession caused in part by a dip in demand from China. It is no leap of the imagination to see a renewed trade war ramping up the pressure on the eurozone’s industrial powerhouse.

On top of the harm already caused, China’s response was to stimulate the economy with more debt and easier financial conditions.

The Bank of England fears those mounting debts are a threat to financial stability, which could become unsustainable if economic growth slows sharply.

If the trade war flares up, watch out for a chain reaction across much of the world."

Watch out indeed. Australia is included in "much of the world" the UBS report refers to, even without the prospect of a change of guard in Canberra post next Saturday’s election.

Sadly all R&R must come to an end, and we’ll be back at the grindstone again come Monday morning.

The Harvest Lane Absolute Return Fund rose +1.65% in April, taking annualised performance since inception in July 2013 to +8.78% with a volatility of 7.03%. By contrast, the ASX200 Accumulation Index has returned +9.54% p.a. with an annualised volatility of +10.87% over the same period. The Fund's Sortino ratio of 1.64 versus the Index's 1.04, average negative return of -1.47% versus the Index's -2.45% and down-capture ratio of -35.58% highlight the Fund's capacity to protect investors' capital in falling markets.

Harvest Lane noted the portfolio made quick time in recouping a significant portion of March's losses. The gain was attributed mainly to two positions that showcased the additional upside the strategy has in the presence of competing bids. The remainder of the portfolio saw broad based gains that rounded out a strong month.

They believe corporate activity levels continue to show strength and the portfolio remains well positioned to capitalise for the remainder of the financial year and beyond.

The Bennelong Kardinia Absolute Return Fund rose +0.55% in April, taking annualised performance since inception in May 2006 to +9.18% with an annualised volatility of 7.07% versus the ASX200's +5.99% with an annualised volatility of 13.27%. The Fund's Sortino ratio of 1.34 versus the Index's 0.24, average negative return of -1.44% versus the Index's -3.26% and down-capture ratio of 40.11% highlight the Fund's focus on protecting investor capital in negative markets.

Top contributors included A2 Milk (+35 basis point contribution), Polynovo (+23bp), Afterpay (+17bp) and Macquarie Group (+16bp). Detractors included Northern Star (-15bp), Independence Group (-14bp), Charter Hall (-14bp), Fortescue Metals (-12bp), Rio Tinto (-10bp) and Oz Minerals (-10bp). The short book made a negative contribution of -46bp, with shorts in financials and Share Price Index Futures the key detractors.

Net equity market exposure was increased from 38.9% to 51.5% (57.0% long and 5.6% short), with the key changes being new positions in Commonwealth Bank, Fortescue and Rhipe, increased weightings in Macquarie Group, A2 Milk and Polynovo, and a reduction in several short positions, including Share Price Index futures contracts.

The NWQ Global Markets Fund rose +2.13% in April, taking cumulative performance since inception in September 2018 to +3.92% versus the ASX200's +2.85%.

The Fund's currency and equities exposures delivered strong positive returns in April with contributions from the relative value positioning in both developed and developing market currencies and relative value positioning in European equities vs. US equities. The Fund's fixed income positions combined to produce a modest loss while there was a small gain overall from the Fund's commodities positions.

NWQ noted the trend of desynchronization in growth outlooks and policy settings across the major global economies continued in April. They pointed out the latest manufacturing PMI data (a barometer of economic activity) indicates that the US economy is relatively strong compared with those in Europe and Asia. However, they added, due to stubbornly low inflation in the US, traders are betting the next move from the Fed will be a rate cut. Against this backdrop there were positive contributions to the Fund's overall return from both the systematic (+1.49%) and discretionary (+0.84%) managers.

The Bennelong Long Short Equity Fund rose +0.54% in April, taking annualised performance since inception in Feb 2002 to +14.93% versus the ASX200's +8.16%.

Bennelong noted Fund volatility continued to settle down in April. At the sector level Consumer Discretionary was the strongest contributor and Healthcare was the greatest detractor, with both similar in magnitude.

More than half of the Fund's pairs were positive, with both positive and negative pair returns generally muted. Top pairs included long Magellan / short Perpetual and long Caltex / short Viva Energy. The worst performing pairs included long Ramsay Health Care / short Healius and long Challenger / short IOOF/ANZ.

Disclaimer: Australian Fund Monitors Pty Ltd, holds AFS Licence number 324476. The information contained herein is general in its nature only and does not and cannot take into account an investor’s financial position or requirements. Investors should therefore seek appropriate advice prior to making any decisions to invest in any product contained herein. Australian Fund Monitors provide information services only and does not provide investment advice. Australian Fund Monitors Pty Ltd is not, and will not be held responsible for investment decisions made by investors, and is not responsible for the performance of any investment made by any investor, not withstanding that it may be providing information and or monitoring services to that investor. Australian Fund Monitors Pty Ltd, A.C.N. 122 226 724