Update - Trade War Escalation

Rationality has not prevailed.

By tweet we have seen the trade war reignited by the US, with China reciprocating with tariffs on American imports. Tariffs are taxes on global supply lines: they will weigh on corporate profits or on consumers’ buying power. The path to resolution is unknowable.

The reaction of global markets to the escalation of trade tensions over the weekend of 11-12 May has been to sell not just cyclical names, but also secular growth favourites such as the SaaS (“software as a service”) stocks in the US. We think this speaks to a possible broad shift in risk appetite.

Last week we lowered our exposure to markets significantly, and are now approximately 65% net in the International Fund. We added shorts against the Dax in Germany, the Hang Seng in Hong Kong and the Nikkei in Japan, as these are all markets with a significant representation of trade-exposed companies. We also added to our short position against the Nasdaq, where we see extreme valuations, notably in SaaS and biotechs.

Seldom have I seen such value presented in markets. We own a portfolio of good stocks, many at extremely low valuations. Over the medium term we are confident given the attractiveness of the stocks we own. In the near term, however, we are seeking to protect against losses which may be caused by the confidence-sapping effects of ongoing trade uncertainty, friction and apparent irrationality.