This $72 Billion Fund is Shorting the Dollar in a Contrarian Bet
By Ruth Carson
May 27, 2019, 6:00 PM MDT Updated on May 28, 2019, 7:58 AM MDT
Brandywine Global is buying Treasuries to hedge EM bond risk
Policy stimulus seen helping global economy reach soft landing
The dollar’s rally may be approaching an end as pressure mounts on U.S. President Donald Trump to strike a trade deal with China, according to Brandywine Global Investment Management LLC.
The money manager, which oversees $72 billion, is banking on this view to short the greenback and buy some of the biggest casualties of the trade war, including the Australian dollar. The rationale? Trump will be compelled to make peace with Beijing to protect the interests of American consumers.
“The tariffs are essentially a tax on the U.S. consumer,” Richard Lawrence, a money manager at Brandywine Global, said in an interview in Singapore. “We keep replaying this and come to the conclusion that we think Trump is motivated to do a deal. All of the traditional support pillars for U.S. dollar outperformance seems to be eroding -- or they’re gone already.”
Greenback has gained versus emerging-market currencies amid trade tensions
Brandywine Global’s wager puts it at odds with a growing consensus that the worst of the trade war is yet to come as Beijing and Washington harden their stance after Trump threatened to unleash more tariffs on Chinese goods. Treasury yields have fallen to levels unseen since 2017, with the 10-year on Tuesday touching 2.27%. And investors including Goldman Sachs Asset Management have turned more cautious on emerging markets amid a flight to safety.
The dollar climbed to this year’s high after discussions between the world’s biggest economies broke down this month, when the U.S. warned of more tariffs and put Huawei Technologies Co. on a blacklist. Beijing said it would retaliate, prompting Wall Street banks including JPMorgan Chase and Co. to reassess the odds of a trade deal.
But in Brandywine Global’s longer-term view, Trump’s show of hostility may be part of a strategy to drum up support among conservative voters ahead of the 2020 U.S. election.
“We think it’s another round of aggressive posturing,” Lawrence said. “As a value-based investor, we’re contrarian by nature. We’re trying to buy discounted assets.”
Trump said on Monday the U.S. was “not ready” to make a trade deal with China, and that tariffs on Chinese goods “could go up very, very substantially, very easily.”
Brandywine Global favors bonds of higher-yielding emerging markets such as Indonesia, Brazil, South Africa, Malaysia, Mexico and Colombia. It is underweight markets with low or negative real yields such as Japan.
The money manager also likes the Australian dollar, which has weakened versus most of its major peers in the past month. The currency, which was hovering around 69 U.S. cents in Tuesday trading in New York, is poised to climb to 70 to 75 U.S. cents in the next year as it’s undervalued and will gain some support from China’s demand for commodities, according to Lawrence.
The portfolio manager is deriving an average yield of around 3% to 6% from various funds consisting of longer-maturity Treasuries and high-yielding emerging-market debt, Lawrence said. The firm likes U.S. government debt due in 30 years, and expects yields on 10-year Treasuries to edge lower by year-end.
“There will be a soft landing for the global economy, that’s the core view that all of our portfolios are positioned for right now,” Lawrence said. “We think there’s sufficient policy stimulus with the Fed’s shift, the People’s Bank of China clearly in stimulative mode.” https://www.bloomberg.com/news/articles/2019-05-28/dollar-reign-nears-end-as-trump-to-cut-trade-deal-fund-says