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SLI Gars fund's top trades revealed

by Robert St George on Jan 17, 2014 at 08:07

SLI Gars fund's top trades revealed

Standard Life Investments' Global Absolute Return Strategies (Gars) fund is hedging against a potential sharp economic slowdown in China.

The £19 billion fund is positioning for this through its call that interest rates in Australia will be cut. Andy Ford, a Gars strategist, put the move in the context of the travails of Australia's natural resources sector as China’s demand for raw materials waned.

‘Rather unhelpfully for Australia’s mining sector, this is happening at a time when various other commodity-producing countries are seeing capacity that has been building up come online,’ Ford said.

This has prompted Australian resource companies to slash their capex budgets and workforces, sending unemployment from less than 5% in 2012 to almost 6% now. ‘There is definitely a case of the Dutch disease,’ commented Ford.

‘We think the Reserve Bank of Australia is going to have to cut rates to spur domestic demand.’ The country’s interest rate is currently 2.5%. ‘They definitely have room for manoeuvre given that inflation is at pretty muted levels.’

Ford added that the new Gars position would also serve as a hedge against a sharp slowdown in China.

A second newly initiated trade has been for Gars to back long-dated European bonds relative to long-duration US Treasuries and Japanese bonds.

‘European yields are pretty well anchored, whereas those in Japan could see an increase,’ Ford explained.

Given the scale of quantitative easing already in place in Japan, Ford anticipates the Bank of Japan is ‘reaching the end of the road’ in terms of what it could do to hold yields down.

Gars had additionally gone short US Treasuries in order to offset the correlation risk between those assets and European bonds, Ford explained.

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