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This fund manager is beating the market. Here’s what he’s betting against

Hawkish comments from Federal Reserve officials and a hotter-than-expected August inflation report have weighed on stock markets in recent weeks as investors grapple with the prospect of higher-for-longer rate hikes even as recession concerns mount.

The Fed announced a third consecutive 75 basis point hike on Wednesday that took its federal funds rate up to a range of 3 per cent-3.25 per cent, the highest it has been since early 2008. Projections from the meeting indicated that the Fed expects to raise rates by at least 1.25 percentage points in its two remaining meetings this year.

Speaking ahead of the Fed meeting, investment veteran Patrick Armstrong believes the Fed is unlikely to keep hiking rates indefinitely.

“I think consensus probably has the Fed getting to 4.25 per cent in March next year, and then probably pausing. It will be driven by the US economy as much as the inflation outlook. I think the US is going to be on the cusp of a recession throughout early 2023 so it’s hard for me to see the Fed hiking aggressively once they realize the US is pretty much in a recession or very close to a recession,” Mr Armstrong, who is chief investment officer at Plurimi Wealth, told CNBC’s “Squawk Box Europe” on Monday.

Mr Armstrong is co-fund manager of the Prosper Global Macro fund, a diversified multi-asset fund with an inflation beating mandate. The fund was up 4.8 per cent as of the end of August, outperforming major indexes in both the US and Europe. The S&P 500 and the Stoxx 600 are down about 20 per cent and 15 per cent, respectively, in the same period.

What’s in his portfolio

Amid the uncertainty in stock markets, he believes the biggest risk is the earnings outlook, which remains “way too optimistic.”

“We have not seen any significant negative revisions despite overwhelming evidence of a really poor economic backdrop where consumer spending is really going to be impeded. Margins are going to be squeezed and so are earnings per share,” he said.

Against this backdrop, the Prosper Global Macro fund has taken on several short positions, as Mr Armstrong bets that the values of these holdings will decline amid the market volatility.

The biggest short holding in the fund is a 20 per cent bet against 10-year Japanese government bonds.

“The Bank of Japan owns half of all bonds that are outstanding. They’re desperately trying to cap their interest rates at 0.25 per cent when other central banks are aggressively hiking … with a 40-year low yet you’re going to be importing inflation. I just don’t see any realistic scenario where the BOJ can keep this 0 per cent 10-year in place. So, I think that’s an incredible short right now,” he said.

Mr Armstrong was referring to the Bank of Japan’s yield curve control (YCC) policy — a strategy that caps 10-year JGBs around 0 per cent and offers to buy unlimited amount of JGBs to defend an implicit 0.25 per cent cap around the target.

CNBC

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