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Fund managers gird for long trade war

Fund managers gird for long trade war

Business Desk A profit warning and muted outlook from package delivery company FedEx Corp (FDX.N) is prompting some high-profile fund managers to prepare for the trade war between the United States and China to last longer than many had originally anticipated. Shares of the shipping company, whose business is often seen as a proxy for growth in the global economy, tumbled 13% Wednesday, a day after it said it planned to ground some planes and cut costs due to the effects of the trade war between the world's two largest economies. "We were hopeful of a trade deal and some sort of return to normalcy and that has not taken place," FedEx's chief executive, Frederick Smith, said on its earnings call. Companies ranging from parts supplier O'Reilly Automotive (ORLY.O) to network gear maker Juniper Networks (JNPR.N) have said the trade war is weighing on their earnings. Yet investors have focused more on FedEx because the nature of its business touches several industries across the globe, including consumer spending. An extended trade war could take the wind out of the sails of the rally in the S&P 500 benchmark index, which has advanced in line with expectations for an imminent breakthrough in the trade war. High-level talks between the two countries are expected to resume again in October. The conflict between the two countries could take a decade to resolve, White House economic adviser Larry Kudlow warned on Sept. 6. As a result, fund managers are moving away from U.S. industrials and technology companies that may be most affected by higher tariffs and instead are looking to pick up some out-of-favor companies and assets that offer long-term opportunities despite the trade war. "It's obvious that China will try to drag this out as long as it can and hope it disappears after the (2020 presidential) election," said Brian Yacktman, whose YCG Enhanced Fund is up nearly 31% for the year to date. Yacktman is moving more into the shares of European luxury goods makers such as Kering SA (PRTP.PA), whose brands include Gucci and Botegga Veneta, that have pricing power but have fallen on concerns about a slowdown in the Chinese economy. Shares of Kering are up 12.4% for the year to date, including a 10% drop over the last three months. "These are companies that can just pass tariffs on because people want to buy the status symbol," he said. Emily Roland, co-chief investment strategist at John Hancock Investment Management, said her firm has been increasing its "measures of protection" against an economic downturn caused in part by an escalating trade war. Despite a 20.1% gain in the sector this year, she said she still sees opportunities in utilities companies due in part to their above-average dividend yields and growth potential. "Rather than reacting and getting whipsawed by the sudden shifts in sentiment, we believe that investors can create diversified portfolios that seek to minimize downside risks from the trade war, however long it may last," she said. Not all fund managers are convinced the trade war is here to stay. "We still think one way or another Trump will end it before the election," said Lamar Villere, a portfolio manager at New Orleans-based Villere & Co. As a result, he has been moving more assets into sectors such as semiconductors, an industry which will be included in $50 billion worth of goods that will be subject to 30% tariffs starting Oct. 1. "The market is giving you opportunities because we think that this is more of a blip than anything else," he said. Emmanuel Roman, chief executive officer at bond giant Pimco, said Thursday at the CNBC Institutional Investor Delivering Alpha Conference that he is seeing opportunities in emerging market bonds due to the pessimism from the trade war. "Obviously the big elephant in the room is the trade war with China and how it will resolve itself," he said. Meanwhile, Xinhua adds; Oil prices jumped for the week ending Sept. 20 following the attacks on Saudi Arabia's crude oil production facilities last weekend, with the price of West Texas Intermediate (WTI) for October delivery up 5.91 percent and Brent crude oil for November delivery up 6.74 percent. During the week, the oil prices experienced spiking, falling back again, and then rising more modestly, registering the biggest weekly gains in months. WTI closed the week at 58.09 U.S. dollars a barrel on the New York Mercantile Exchange, while Brent crude finished the week at 64.28 dollars a barrel on the London ICE Futures Exchange. WTI and Brent crude prices have increased 27.95 percent and 19.48 percent, respectively, so far this year, falling from their peak levels in April when the growth of WTI hit over 40 percent, and Brent crude over 30 percent. During the week, WTI and Brent crude moved in the same directions, and the two-day gains outweighed three-day drops. Oil prices surged on Monday after drone attacks hit Saudi Arabia's key oil facilities and forced the country to cut its crude oil output by half. According to preliminary estimates, the explosions led to the interruption of a quantity of crude oil supplies estimated at 5.7 million barrels, or about 50 percent of the Saudi Aramco plants' production. WTI increased 8.05 dollars to settle at 62.9 dollars a barrel, while Brent crude rose 8.8 dollars to close at 69.02 dollars a barrel. Oil prices started to decline on Tuesday after news reports suggested Saudi Arabia will restore its oil output soon. The trend continued on Wednesday as data showed a surprising increase in U.S. crude oil inventories. For the two days, WTI lost 4.79 dollars and Brent crude decreased 5.42 dollars. U.S. crude oil inventories increased 1.058 million barrels during the week ending Sept. 13, defying market expected draw of 2.496 million barrels, which implied weaker demand and was bearish for crude prices. Oil prices rose again on Thursday as the market remained concerned about possible supply shortage. Although Saudi Energy Minister Abdulaziz bin Salman said Tuesday that oil supply will be fully restored by the end of September, analysts said the low global spare capacity at the moment remained a concern for investors and supported oil prices. WTI edged up 0.02 dollars to settle at 58.13 dollars a barrel, while Brent crude added 0.8 dollars to close at 64.4 dollars a barrel. On Friday, oil prices declined again despite dropping of the U.S. rig count. WTI lost 0.04 dollars to settle at 58.09 dollars a barrel, while Brent crude decreased 0.12 dollars to close at 64.28 dollars a barrel. Oil prices have kept gaining momentum since the start of the year due to some geopolitical concerns and OPEC's decision of production cut. The momentum has slowed down, mainly because of the concerns over downturn in demand for crude oil. The slowing global economy continued to be a major headwind for crude oil. The slower economic growth of the world, mainly due to the trade disputes between the United States and China, will lead to less demand for oil, which in turn would put downward pressure on oil prices. Moreover, a rising U.S. dollar in the past months has dragged down the greenback-denominated crude futures, as the U.S. Dollar Index has been keeping uptrend since mid-2018. During the week ending Sept. 20, the U.S. Dollar Index finished on a positive note, surpassing the 98.40 level. Oil is mostly traded in dollar all over the world and a stronger dollar pressures the oil demand. However, the concerns over crude oil supply following the attacks on Saudi Arabian production facilities have obviously outpaced the worries on the slowing economic growth as well as stronger U.S. Dollar Index level. For the upcoming week, the market would watch closely the trade talks between China and the United States. China and the United States held vice ministerial-level trade talks in Washington on Thursday and Friday, and conducted constructive discussions on economic and trade issues of mutual concern. The two sides also carefully discussed the specific arrangement for the 13th round of China-U.S. high-level economic and trade consultations scheduled for October in Washington. The two sides agreed to continue to maintain communication on related issues. In the meantime, according to analysts, the outlook of oil prices remains volatile due to Saudi oil crisis. The questions are how quickly the production can be restored, and how much spare capacity there will be left in the oil market.

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