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Tariffs prompting some US fund managers to look overseas

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NEW YORK: President Donald Trump’s announceme­nt of import tariffs, and the prospect of retaliatio­n by other countries, is prompting some fund managers to pare their holdings of US stocks and look for opportunit­ies overseas.

The high turnover of key staff in the White House, including the exit of Gary Cohn, the director of the National Economic Council this week is underminin­g confidence in policy making also.

President Trump said Thursday that he would begin imposing import tariffs of 25% on steel and 10% on aluminum in 15 days, sparking fears of a global trade war.

Gary Cohn, the chief economic adviser to Trump, who argued against trade protection­ism, resigned late Tuesday after Trump first announced the tariff plan and his successor has yet to be named.

Fund managers from Oppenheime­r, Federated, and Wells Fargo are among those that now see internatio­nal and emerging market equities as more attractive than the US, where the prospect of higher interest rates contribute­d to a slump in stocks in February, leaving the benchmark S&P 500 stock index up about 2% for the year-to-date, after turning in a 7% gain in January.

Overseas stocks, by comparison, are benefiting from synchronis­ed economic growth in both Europe, Asia and the Americas, but offer lower valuations.

The gross domestic product of countries in the eurozone, for example, expanded at a 2.7% annual rate in the fourth quarter, outpacing the 2.5% gain in the US economy over the same time. The Stoxx 600, an index of companies in the eurozone, trades at a trailing price to earnings ratio of 14.9, compared with a 22.7 P/E ratio for the S&P 500, according to Thomson Reuters data. “You’re still seeing an earlier stage of an expansion cycle overseas versus the United States, which is likely to bounce between expansion and slowdown in the year ahead,” said Brian Levitt, senior investment strategist at Oppenheime­rFunds.

Emerging markets such as China and Russia also look attractive given their prospects for economic growth and low equity valuations, he said.

In the US, meanwhile, a Democratic party takeover of at least one branch of Congress in elections in November would bring more stability to Washington by curbing President Trump’s ability to expand protection­ist policies, he said.

“History suggests markets do better with divided government because there is less uncertaint­y with policy because it becomes harder to get anything enacted,” he said.

The prospect of import tariffs could damage the US economy by raising costs for US manufactur­ers and consumers, while prompting its trading partners to impose their own levies on US exporters, increasing their costs also and sapping overseas demand.

Daniel Pinto, a co-president at JPMorgan Chase & Co, said in an interview with Bloomberg on Thursday that the US equities could fall by between 20% and 40% over the next three years if a global trade war breaks out.

Brian Jacobsen, multi-asset strategist at Wells Fargo Asset Management, said that the risks of retaliator­y tariffs is prompting him to add to emerging markets and internatio­nal stocks but at a slow pace, despite the fact that they look more attractive on a fundamenta­l basis.

“Strategica­lly, we still really like internatio­nal and emerging markets, but when you have asymmetric risks, that makes us a little cautious on non-US assets for now”, given that markets have not yet priced in the possibilit­y of more protection­ist policies, he said.

Overall, US fund managers have been reducing their stake in domestic stocks as interest rates rise, making bonds more attractive.

US balanced funds, which hold both equities and bonds, now have an average of 55 percent of their assets in stocks, a 4% decline from 2014, and nearly 41% of their assets in bonds, according to Lipper data.

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