Top Japan Hedge Fund Says Trump Rally Will Fade

By Kathleen Chu and  Komaki Ito

Tsukasa Shimoda, whose UMJ Galleyla Fund beat all other Japan-focused hedge funds last year, says the Donald Trump rally will soon fade as the U.S. president’s protectionist policies start to hurt the global economy.

“The U.S. economy perhaps may improve because of him,” said Shimoda, whose $42 million UMJ fund returned 19 percent last year. “But as he makes a mess of things, that would affect the global economy negatively.”

Hedge fund managers are diverging on whether Trump will introduce growth-friendly policies that drive equities higher, or pursue a protectionist agenda that hurts global trade. Ray Dalio, who runs the world’s largest hedge fund and in November was bullish on Trump’s ability to stimulate the economy, now says he’s more concerned that the damaging effects of populist policies may overwhelm the benefits of a pro-business agenda. Billionaire George Soros, who has been especially harsh in his denouncement, last month called Trump a “con-man” and said the equity rally will come to a halt.

In his first weeks in the White House, Trump has withdrawn from the Trans-Pacific Partnership pledging an “America First” trade policy, and thrown U.S. relations with Mexico into turmoil by demanding America’s southern neighbor pay for a border wall. His executive order halting entry by people from seven predominantly Muslim countries was criticized by high-profile Silicon Valley executives including Apple Inc.’s Tim Cook.

Inward Thinking

“That inward kind of thinking can’t be good in the long run,” said Shimoda, who sees the rally running another two-to-three months before the market turns.

Trump’s early policies, with their focus on curbing immigration rather than spending to boost growth, have already sent tremors through markets. The dollar slumped against every major peer except the Mexican peso in January, reversing some of its post-election surge. The yen’s strength has helped to send Japanese shares down 2.5 percent so far this week.

Still, some hedge fund managers remain bullish on Trump. The Singapore-based PruLev Global Macro Fund, which gained 9.5 percent in January, said it is betting on his “pragmatic and pro-business stance” by buying stocks in the U.S. and its main trading partners.

Shimoda, who invests on a six-month horizon, said he is still currently adding to his stock positions because of buying momentum, but is monitoring the moving average of the Russell 2000 Index as an indicator of when the market will change direction.

Trump Volatility

“Because of Trump, the market will become more volatile,” said Shimoda. “Whether it’s a collapse of the U.S. stock market or a strengthening of the yen, the market will enter an adjustment period.”

UMJ Galleyla was Japan’s best-performing hedge fund in 2016, according to data compiled by Bloomberg. It has beaten Eurekahedge’s Japan Long Short Fund of Funds Index two out of three years since it was launched in 2013.

Among the stocks it owns, Hitachi High-Technologies Corp. gained 43 percent last year, and Fuso Chemical Co., surged 50 percent. Fuso rose to a record in Tokyo trading Friday, extending this year’s gain to 15 percent, and Hitachi High-Technologies added 0.4 percent, to be up 4 percent for the year.

Kenichi Sawada, chief investment officer at Tokai Tokyo Investment Management Singapore Pte, is also seeking to profit from Trump-induced volatility.

Tokai Tokyo, whose Japan Phoenix Fund ranked fifth in returns last year, makes contrarian bets on Japanese companies, with an average holding period of seven days, Sawada said.

For example, it bought Mazda Motor Corp. after its shares dropped on concern the automaker would be affected by a potential U.S. tax on Mexican imports to pay for Trump’s border wall. It simultaneously shorted Toyota Motor Corp., which had risen as investors bet a weaker yen would make its cars more competitive, he said.