Third Point’s Q1 2019 Investor Letter

Daniel Loeb’s Third Point recently released its Q1 2019 Investor Letter – a copy of which you can download below. Among other things, the fund disclosed 8.8% gain for the quarter for its Offshore Fund. The stocks that mostly contributed to its positive performance were  Nestle, Baxter International Inc. (NYSE:BAX), United Technologies Corporation (NYSE:UTX), and Campbell Soup Company (NYSE:CPB).

By the end of the First Quarter, equity markets had mostly bounced back from Q4 2018’s sharp decline. The dovish shift in Fed policy – which over the last six months went from a three to a zero-hike baseline for 2019 and accelerated the end of its balance sheet runoff – has primarily driven the rally. With this shift now arguably reflected in asset prices, further equity uplift likely will come from improving global growth or re-positioning. The balance of evidence today suggests a rise from these levels: global manufacturing PMI has fully retraced its rise from early 2016 to its peak in late 2017; US consumer fundamentals like real labor income and the consumer saving rate are strong; and renewed stimulus and a near-term trade deal with the US are positive for China. Better Chinese growth should help the Euro Area and eventually, the US. The case for a gradual acceleration of US growth is straightforward: the current drag from financial conditions is at its peak and should offset waning fiscal stimulus. Improving growth should boost cyclicals, which have recaptured little of their relative decline since mid-2018.

A key issue is the durability of the Fed’s shift. Despite evidence of a tight labor market, core inflation has remained low, and rates markets are predicting that the Fed will remain on hold for at least this year. The range of outcomes for the Fed Funds rate is wide. If US growth fails to pick up, signaling heightened recession risk, the Fed could cut swiftly. On the other hand, markets could price in a return to hikes if we see above-trend growth coupled with core inflation moving towards its target and an unemployment rate resuming its decline towards a 50-year low after a temporary rise in participation. What the consensus may be missing here is that a patient stance by the Fed, which means fewer hikes now, may mean more hikes later. Outside of Fed policy and direction, we are closely monitoring the impact of trade negotiations and their related effects on inventory builds, input costs, tax refunds, and European economic conditions.

You can download a copy of Third Point’s Q1 2019 Investor Letter here:

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