The Odey European Fund, with close to $2.5 billion under management, delivered 4.6% performance in February while building a significant short position in Japanese ten year bonds.
“Sometimes things suddenly appear very clear,” wrote Crispin Odey, the fund’s namesake and portfolio manager, in an investor letter. Saying that he sees two currency zones, one “Euro zone” and another “dollar” zone that incorporates the emerging markets.
“In these systems, the economy in the best shape is Germany inside the Euro zone and the USA inside the US dollar zone,” Odey wrote, expressing the opinion that both currencies were undervalued, but that’s where the similarities end. The Euro zone runs an account surplus with the rest of the world. With the currency rising, Odey notes, Germany’s self preserving reaction is to tighten belts. “After all unemployment (in Germany) is at an all time low and makes such a policy sensible,” he notes, contrasting greater Europe being mired in deflation and bouts of higher unemployment.
The biggest winners in the Odey European long portfolio in February were m Sports Direct (+154bps), Sky Deutschland (+72bps), PACCAR (+68bps) and Avis Budget Group (+53bps). The best winner’s in the fund’s short book were Elekta (+34bps) and Coca-Cola (+10bps). The largest losers in the long book were DMG Mori Seiki (-21bps), Barclays (-20bps) and Orix (-19bps).
The portfolio’s short book generated -4.2% performance on the month, with an interesting short position in Peugeot (-65bps), followed by Kazakhmys (-37bps) and Imperial Tobacco (-22bps). Peugeot was the fund’s largest exposure, with a 5.5% stake. Peugeot is currently engaged in a board shakeup as the French government is providing a capital injection amidst a steady stream of yearly losses totaling billions of euros.
Other major European shorts the firm is holding, according to the Novus European Advisor, are Aberdeen Asset Management in the US, Ashmore Group plc (LON:ASHM), Intu Properties PLC (LON:INTU), Aggreko plc (LON:AGK), Metso Corp, J Sainsbury plc (LON:SBRY) (OTCMKTS:JSAIY), Admiral Group plc (LON:ADM), Apr Energy PLC (LON:APR), Persimmon plc (LON:PSN) and The Sage Group plc (LON:SGE).
“The USA on the other hand has been forever run on a Keynesian basis,” he observed. “The Fed believed that if they can get the economy growing at between 4-6% nominally per year, the politicians will be happy.” Odey said quantitative easing was “very helpful” because it “undermined any bid to the US dollar,” which led to an overvaluing of emerging market currencies. This gives the US a chance to grow between 4-6%, “which would be nothing less than Janet Yellen’s pledge.” In addition to a large JGB short, the hedge fund is also short the US ten year note.
“So one economy will be happy to tighten and the other won’t be happy until its economy is growing much faster and wages and employment, housing and capital investment are very much stronger than today,” he wrote. “I know which economy I want to be invested in.”