Sanditon’s Chris Rice is gearing up for a US-led global business cycle slowdown, saying he will increase the cash weighting in his European fund to 20 per cent as a “first line of defence”.
The bearish manager said he was prepared to keep a fifth of his £275m offering in cash when European corporates take a downwards turn.
The fund currently has 8 per cent in cash, which Mr Rice described as “bullish for us”.
Mr Rice added that holding cash was now more sensible than in 2008, because defensive assets had become unreasonably valued.
“The big part of the trade [in 2008] was having the skew right. That skew is not as attractively priced now.”
He said there would be two scenarios that would turn the current bull market the other way: the spreading of Chinese deflation into global markets, or unchecked US inflation.
The manager expected the latter to be the root cause, suggesting the US Federal Reserve was “behind its own rates curve” and had made a “massive policy mistake” by not embarking on a normal rising rate cycle.
“Our central scenario is the chances of cyclically negative returns are rising as we are at the end of a normal economic expansion, particularly in the US,” Mr Rice said.
“It looks and feels and smells like every other slowdown I’ve researched.”
He said US core inflation would reach 3 per cent by the end of this year, and described the prospect of negative real interest rates – mooted by some as a response to signs of growth slowdown – as an illogical reaction to a seven-year bull market.
“It’s crazy. The likeliest way this cycle decides to finish itself is a classic blow off. The US is miles behind its own interest rates curve and will be racing to catch up,” the manager said.
Mr Rice’s own portfolio avoids some cyclical sectors but does retain elements of risk.
He said European financials were a value trap because the sector had too many bad-performing loans, and that banks had wasted their crisis in not cleaning up loan books.
But he added: “We have a preference for the commodity value style relative to the financial value style.
“My basic premise for growth and the ‘growth defensive’ market is there needs to be a distinction between those firms that earn in dollars and those in emerging market currencies. The dollar guys are horrendously expensive.”
Mr Rice mentioned emerging market-focused Carlsberg, Pernod Ricard and Heineken, and said free cashflow yields of 5 to 7 per cent represented “enough carry to protect”.
“There are a number of ways to protect, the first is cash. It is uniquely quite cheap relative to defensives. [Defensives that earn in dollars] are showing themselves to have very high valuations relative to history. There are a lot of new assets very long of these types of stock.”
He added domestic service stocks were “a nice way” to playing the prospect of end-of-cycle inflation.
Low interest rates, the oil price and a strong dollar had meant a “golden era” for the car sector, Mr Rice said. This long/short Sanditon European Select fund is shorting these stocks in anticipation of a reversal.
The manager added his cash holding would help him ensure long-term returns were protected.