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Don’t believe the US infrastructure hype, says L/S manager

Don’t believe the US infrastructure hype, says L/S manager

Since the US presidential election, a host of energy, infrastructure and utilities funds have been launched in response to President Donald Trump’s encouraging rhetoric.

A case in point is BNY Mellon’s recently unveiled US infrastructure debt fund, designed to tap into possible government spending on the sector.

Despite this, UBS’s Charles Burbeck, who runs the UBS Global Equity Long Short fund alongside Scott Wilkin, takes a different view on these markets, and is net shorts industrials, materials and utilities.

‘In the case of infrastructure we are reasonably positive about what’s happening in the US in terms of the economy and there has obviously been a lot of hype post-Trump. Nevertheless, we think a lot of valuations in the infrastructure plays are very overvalued and it’s debatable whether there is going to be a wave of development in the infrastructure sector,’ he says.

Stock selection

When it comes to utilities in particular, Burbeck has a clear bias as he currently holds a 3.62% long position versus a 9.51% short. This stance, he says, is a play on potential US interest rate moves.

‘As a sector, utilities has been built up in the last few years by investors who have been hungry for yield. The stocks are overvalued partly because they are dependent on having very low interest rates for valuations.

‘We tend not to focus on the macro picture and are driven more by stock fundamentals, but the likelihood is that interest rates will go up rather than down. They are at generational lows in most markets and in the next four years rates are likely start climbing, making valuations on utilities quite challenging,’ he says.

Shrewd calls like this have helped Burbeck pull ahead and over the three years to the end of April 2017, his fund returned 15.4% in euro terms versus 5.5% from the average fund in the long/short equity sector.

Burbeck’s bets on the energy and materials sectors have also powered his performance. The fund is currently positioned 31.16% long and 25.06% short on energy, and 5.79% long versus 9.06% short on materials.

‘Energy and materials have both generated great alpha for us, particularly on the short side. We have a great team of analysts working on the sector who have been able to identify overvalued situations, which can often lead to eventual falls in share price,’ he says.

Earning in emerging markets

Another area where Burbeck is adding alpha is emerging markets, and he says his team is particularly keen on Argentina, where he currently holds a 2.87% long position.

‘We have been long Argentina with a few energy stocks. Until recently the country has been off the radar for a lot of investors because of issues with political and corporate governance, as well as problems with the economy.

‘More recently the political backdrop in country has improved and some of the energy positions we purchased last year have worked very well for us. This is one sector that Argentina seems to have a competitive advantage in, in terms of its resources,’ he says.

However, Burbeck says the team tends to focus on larger emerging market countries such as Brazil, while Argentina is more of a niche bet for the fund.

‘We are slightly long Brazil (2.87%) and also Russia (1.12%), we see great value in stocks in both of these markets. This is particularly the case in Russia, which hasn’t performed well so far this year,’ he says.

‘In recent years Brazil and Russia have suffered economic recessions and political woes, but the stocks were over discounting these concerns, making it easy for us to establish long positions there’.

This article originally appeared in the June edition of the Citywire Selector magazine.

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