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- The stock market has enjoyed strong year-to-date gains as the economy defied widespread recession predictions.
- But the upbeat trend may be on its last legs, according one hedge fund that has slashed its net exposure to US stocks.
- Vantage Point is positioning for a US hard landing and is seeking value in Chinese equities instead.
The US stock market has notched impressive year-to-date gains as the economy proved much more resilient than most experts expected.
The S&P 500 share index is up 15% so far in 2023 against broadly bright economic back ground - corporate earnings have been good, inflation has eased rapidly and the job market has held up quite well.
However, that trend doesn't have much room left to run, according to one hedge fund, which is positioning for a pullback in equities.
Vantage Point Asset Management, a Singapore-based hedge fund with $800 million assets under management, believes tighter lending conditions and warning signs from the labor market indicate the US economy is headed for a hard landing, or a sharp downturn, according to Bloomberg.
Nicholas Ferres, the fund's chief investment officer, told Bloomberg that he took his net long exposure in the firm's main fund to 10% in July — or "virtually flat", according to him.
Net exposure refers to the difference between a hedge fund's long positions and short positions and is expressed as a percentage.
As it cuts its exposure to US equities, Vantage Point instead aims to allocate capital in hard-hit assets such as Chinese equities, according to Ferres. He plans to eschew large property developers in the Asian nation – of whom are in crisis of late – while favoring large technology firms such as Baidu and JD.com.
Ferres is not the only one urging caution in the US stock market. Last week Capital Economics said in a note that it believes the US economy is under the most pressure since the 2008 financial crisis and teeters on the cliff-edge of recession.
The research firm underscored the economic impact of tight financial conditions after the Federal Reserve aggressively hiked interest rates over the past six quarters – raising its benchmark interest rate to its highest range since 2001.
The New York Fed has predicted the US has a 66% chance of tipping into a recession by July 2024, though signs of a slowdown have not yet appeared in economic data.
GDP grew 2% over the first and second quarters, and Atlanta Fed economists are expecting the economy to expand 3.9% year-per-year over the third quarter. Their prediction goes against the criteria needed to define recession, which is technically classed as two consecutive quarters of negative GDP.