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A US$222b manager shifts to cash on worries trade war will spread

[SINGAPORE] A US$222 billion wealth manager that piled up cash to the highest level in years before last month's global equity rout is now worried Europe might be next on US President Donald Trump's tariff radar.

Pictet Wealth Management boosted cash to about 15 per cent of holdings from around 9 per cent at the start of this year, and turned tactically underweight on global equities in May, said David Gaud, the chief investment officer for Asia. He said that the cash is almost three times the level that a fund should have over a decade. Money managers with US$528 billion between them have an average cash balance of 5.6 per cent, according to a Bank of America Merrill Lynch survey.

The US's trade deficit with Europe is much larger than it is with Mexico, making the region potentially "the next big candidate" for tariffs, Mr Gaud said in an interview in Singapore on Tuesday. Such a protective measure would be "very destructive" amid Brexit and economic weakness in Italy, he added.

Mr Gaud has turned more pessimistic since June of last year, when he said that turbulence from the threat of a trade war wasn't something to lose sleep over. He now worries that rising trade tensions are delaying the economic recovery that had been anticipated in the second half as tariffs pressure consumption.

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Mr Trump on Tuesday accused the euro area and China of weakening their currencies to gain an economic advantage. The president has already imposed tariffs on US$200 billion worth of Chinese goods and has planned to target an additional US$325 billion in mainland products. He has also threatened to do the same against Mexico and carmakers in Europe and Japan.

Europe becoming the next potential target for tariffs is only one of several risks facing the market, according to Pictet. The firm's decision to underweight equities was made due to factors including the view that this year's strong performance in stocks provided a chance to lock in returns. The MSCI World Index slid 6.2 per cent in May, paring its gain for this year to 14 per cent.

The equity gauge has rallied 5.5 per cent this month amid speculation that trade tensions could ease at the G-20 summit in Japan next week. The US and China on Tuesday said that their presidents will meet there to relaunch trade talks.

Although cautious about trade-related shares, Mr Gaud remains bullish on prospects for domestic-oriented stocks in China, India and Indonesia. The outlook is also good for Singapore's property trusts and Macau casinos focusing on the mass market, he said.