Kestrel Investment Partners (KIP) is shifting positions away from export-orientated stocks after analysis shows global exports and production will decelerate as a result of trade wars and a drop in oil demand.
After carrying out analysis, the firm is predicting the monthly growth rate in global exports and production to decelerate from 0.03% at the end of July to -0.15% by December; its lowest level since Q3 2015.
Kestrel's projections for production and global trade incorporate global industrial production, factory orders, durable goods, exports and imports.
John Ricciardi, CEO of KIP and manager of the £89m Kestrel Global Portfolio, said: "China and other emerging markets have slowed this year meaning oil demand has dropped."
He added oil exports had taken a hit in recent months following a drop in demand from emerging markets and supply issues in Venezuela and Iran.
Furthermore, US President Donald Trump's decision to impose a 10% tariff on around $200bn worth of Chinese imports with threats of an increase to 25% by the start of next year if no solution was found, was also having an effect on global exports.
The CEO said the reason for the trade war was political not economic. Washington, he said, wants North Korea to denuclearise after the country developed delivery systems that reached Japan last year.
"Over the last two years, North Korea has changed the status quo by developing delivery systems for their nuclear weapons," he continued.
"North Korea is entirely kept alive by China. The US cannot accept North Korea having nuclear weapons which can reach them so it is using its economic power to force a resolution in the Korean Peninsula and the main way to do this is through exports."
Ricciardi added the drop in rate of manufacturing and trade growth globally reflected a more difficult environment regarding liquidity conditions, weaker producer price support and higher US interest rates.
In response to this slowdown in global exports, the CEO said he had moved underweight in export-leading equities such as automakers, electronics and crude oil producers.
"Consumer discretionary sectors such as automobile manufacturers, energy sectors including crude oil producers, and electronics sectors delivering both consumer and industrial products, hold by far the greatest share of world exports, and likely will face the stiffest valuation headwinds as global trade decelerates into Q4 2018," he commented.
Overall, Ricciardi has cut the equity exposure on the fund from 75% to 40% over the past few months while increasing its weighting towards US Treasuries.
Relative to European bonds, he said US 10-year Treasury yields offered far more value at 3.15% versus the negative yield on German bunds.
"Bond prices will rise because in the short-term central banks will be less aggressive due to a temporary peak in global prices," he added.
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