| Leon Cooperman of Omega (Bloomberg) |
Omega Advisors’ Leon Cooperman seems to have moderated his views on the global markets, compared to his views at year-end.
The New York hedge fund manager seems to have scaled back several of his favorite year-end plays, seemingly due to rapid movements in various markets in the first three months of the year, according to his most recent quarterly reports.
Through March 31, Omega was up 1.6 percent, and it was up 2.9 percent through April 15, according to the first-quarter letter to clients dated April 17 obtained by Alpha. The letter pointed out that Omega enjoyed its biggest gains from developed-country long-equity positions, which kicked in 102 basis points to the gross portfolio return. Developed-country short positions in equities, index futures and options accounted for 35 basis points of gross gains, while structured-credit/distressed-debt positions added 20 basis points.
However, Omega was bullish on several markets earlier in the year that have now enjoyed sharp moves up. For example, the letter pointed out that the firm expected that European and Japanese equity markets “would significantly” outperform the U.S. this year. Sure enough, euro markets have already risen 20 percent “currency-hedged” and 7 percent in dollar terms compared to just a 1 percent gain in the Standard & Poor’s 500. “From here, we do not believe the European equity market is ‘special’ relative to the U.S. equity market,” said the letter. “Our expectation is, currency-hedged, that these two markets will deliver roughly the same return between now and year-end.”
A similar situation has played out in Japan, where the Nikkei and Topix both surged 12 percent. “We nonetheless continue to expect the Japanese equity market to moderately outperform U.S. shares between now and year-end,” the letter stated. The letter said that Omega has a combined 5 percent to 7 percent macro position in the Japanese equity market and was short the yen.
Another macro trend Omega got right is the strength of the U.S. dollar, especially compared with the euro and yen. But as a result of the dollar’s strong move up, Omega is moderating this position as well. “While we expect this to continue, we believe the rate of ascent of the dollar should slow considerably for at least several reasons,” the letter added.
Omega noted the likelihood that the Federal Reserve will move slowly before it starts tightening, and very low sovereign bond interest rates in the euro area and Japan and the dollar’s strength over the past 12 months, “appears to already discount a larger U.S./non-U.S. sovereign interest rate differential than currently exists.”
Omega has also scaled back its bet on energy stocks. In the year-end letter, the firm said it held a low-teens exposure to the group. “We believe that at current levels, our energy names offer exceptionally good value,” said the letter, signed by Cooperman and vice chairman Steven Einhorn, but unlike the year-end letter, not by macro global analyst Andrew Parlin. “Equally important, we expect oil prices to lift during the course of this year and next as U.S. production growth slows and sustained global economic growth boosts demand.”
Omega also told clients that it is now “slightly overweight” the energy sector, “but much less so than last year.” It currently has a 10.2 percent weighting versus 8 percent for the S&P 500.
Omega continued to press the view that the global market is currently oversupplied by about 1.5 to 2 million barrels per day “and this should represent the peak of oversupply.” It added that between now and the end of the summer, “refinery demand should reduce current oversupply by 1 million barrels per day and OPEC production cuts, a slowdown in U.S. production growth, and/or a pickup in demand for oil at these lower prices should virtually eliminate excess supply within a year.”
In fact, Omega is currently most overweight consumer-discretionary stocks and most underweight information technology, health care and industrials. However, Omega stressed that in general it does not target sector weightings but that it is instructive to understand returns.
Looking out to the end of the year, Omega continued to expect a 7 percent to 9 percent gain for the S&P 500 in 2015, which is in line with the benchmark’s historic average annual return. “More importantly, we are of the view that the current U.S. equity bull market will last quite a while longer than the next 12 months,” the letter added.
The main reasons: “Expectations of a synchronized long-lasting global economic expansion and a synchronized long-lasting period of global central bank accommodation.”
Not bad for the seventh year of a bull market.
