Odey Asset Management’s Crispin Odey has turned sharply bearish in recent months.
The London–based hedge fund manager is now slightly net short in his flagship equity hedge fund after maintaining net exposure to the markets of between 80 percent and 120 percent since March 2009.
“Recent moves in markets have highlighted how tired this bull market has got,” Odey Asset Management tells clients of the Odey European fund in its May report, obtained by Alpha.
The firm, founded in 1991, manages $5 billion in hedge funds and another $7 billion in long-only funds. Crispin Odey himself manages several funds accounting for roughly $3 billion in hedge fund assets and $5 billion in long-only assets.
In general, Odey has become concerned about a market top and the impact that reduced liquidity could have on prices if investors become less upbeat about the markets. He thinks short positions present a good risk-return profile given the fully priced market levels and historically low level of volatility.
The May report for Odey European, one of the funds Crispin Odey manages, stresses that one year ago 90 percent of U.S. stocks were close to their highs. Since then the market has risen 12 percent, yet only 60 percent of U.S. stocks are near their highs.
The report also points out that although liquidity in stock markets has recently increased by 50 percent, it is still 70 percent below its level of five years ago. Odey attributes this situation partly to quantitative easing and low volatility. “But it does mean that if people need to change their minds they will not be able to do so without it being at great cost,” Crispin Odey warns in the report.
Noting that the markets have more than doubled since the first quarter of 2009 and the earnings yield is a little more than 5 percent, he asks: “Is it such a sacrifice to choose to play the next year on the sell side? Low volatility has allowed me to build the position without too much pain.”
Odey is also very worried about the competitiveness of China and its prospects for growth after many years of 15 percent wage growth combined with what many believe is an overbuilt housing market. He is said to believe a slowdown could have a ripple effect on commodity, currency and equity markets.
In his April monthly report, Odey tells clients China “is caught by its own success.” He points to what he describes as a fixed undervalued exchange rate since 1994, allowing China to build its infrastructure, using cash generated from its massive exports.
“This worked well until 2008 and then with nearly 9 percent of world trade but, experiencing weak export markets, China chose to increase the infrastructural spend to offset the weak exports,” Odey adds. “Six years of China compensating for increased uncompetitive export industries by increasing building activities now has led to a vicious circle of building pushing up wages, which under-mines exports, which drive the government to spend more.”
Odey says China bulls can easily make the case that things will work out with “a tweak here in bank reserve requirements and lower interest rates,” which would lead to more lending and further growth. However, he disagrees.
“The very presence of the shadow banking over the last four years affirms for me that returns just do not exist inside China at present,” he elaborates, stressing that 70 percent of rich Chinese want to get their wealth out of the country.
Odey says that no assets are cheap in the world, but China finds itself in a more unusual position. “At some point the Chinese will dream about what they did in 1994,” Odey adds. “At that moment do not yourself dream of becoming a country which sells raw materials into China and borrows cheap money from the USA. Whereas 2008 was a crisis over solvency, with borrowing at 8 percent to invest in assets yielding 3 percent, this crisis will be a crisis of liquidity. As Keynes remarked, ‘It is good for people to travel, goods to travel, but savings should not travel.’?”
Odey does not specify how exactly he is playing his bearishness on China. He also as a rule does not have direct exposure to emerging markets because he is not confident they have definable legal systems.
Instead he is making his bearish bet on emerging markets by taking big short positions in the Australian dollar and the South African rand, two currencies heavily tied to the fortunes of the commodities markets.
Odey’s funds are also heavily short the Russell 2000 Index as a hedge, Japanese bonds and British gilt futures. At the end of April, they were heavily short U.S. Treasuries.
Odey also has strong conviction in his long positions, especially homebuilders and capital goods companies. His three largest longs among stocks at the end of May were British retailer Sports Direct International, Delta Air Lines and homebuilder D.R. Horton.
Odey was also long U.S. bonds at the time. However, he now has no directional Treasury exposure. Among currencies, he had large long positions in the euro and U.S. dollar.
So far this year Odey has been having a tough time. For example, Odey European was down more than 12 percent through June. However, it was up more than 25 percent last year and more than 30 percent in 2012. And since its June 1992 inception, the fund has compounded at 13.3 percent annually, compared with just 7.6 percent for the MSCI Daily Total Return Net Europe Index.
