With over $12 billion under management, London hedge fund manager Chrispin Odey continues to struggle in 2014.

After stumbling to the tune of 7.2 percent in March, Odey European the hedge fund is down 12.5% YTD, a disappointing number, after a strong 2013 return of approximately 30%. Ironically, the former son in law of Rupert Murdoch predicted that 2014 would be a good year for equities.

Odey June perf

Odey moves to net short position

The cautious Odey may have his day, however, as the fund moved to a net short position in June, according to an investor letter reviewed by ValueWalk. “It is not just that global equity markets look relatively highly valued in our view, with the Japanese market the only notable exception, but also that the already challenged Eurozone recovery could now be peaking,” he wrote.

Odey notes the work of Harvard University professor and author Ken Rogoff, who wrote that in order for an economy to recover from a depression it requires the three Ds of devaluation, deflation, and default. “We believe that while the US has largely dealt with its debt crisis,” he optimistically wrote, “the Eurozone has not experienced any of the Ds and it is, therefore, of little surprise that credit growth and economic recovery face headwinds in Europe.”

Odey continues to hold sizable positions in their core high-conviction stocks while noting government bond yields in Europe may continue to drift lower “with conditions as they are.” Lower bond yields in turn “drives banking profits closer to zero, limiting profitability across the Eurozone and narrowing the pool of attractive investment opportunities.” The fund remains net short of EU banks due to, among other issues, unresolved balance sheet concerns.

Odey: Consumer led recovery is still a challenge for Europe

Odey says a consumer-led recovery is still a challenge for Europe, as inflation data for the Eurozone remains below 1%. “While this can support real spending power there is of course only minimal wage growth.”

Odey thinks trouble is ahead in Europe and mentions one of the troubling “d words.”

“The Euro-zone has not had the demand deflation required; the periphery has experienced some but suffers from continuing high unemployment,” he wrote.

Odey notes that without credit growth a self-sustaining recovery is difficult to achieve. He says private sector loan growth remains in decline, and the lack of loan defaults in the Eurozone is now impeding loan growth.  In May, for reference, he notes corporate lending in the Eurozone fell 2.6 percent year over year, with lending to households down by 0.7 percent. This shows a total private sector in decline by 1.6 percent versus 1.3 percent in the prior month.

The fund holds shorts in consumer non-durables, but sees a pick up in the US recovery story, with Odey’s long exposure primarily in the US and Japan.

Odey Positions

According to the letter to investor:

the long equity book returned -0.4% after gains  achieved on holdings such as DMG Mori Seiki Co Ltd (ETR:GIL) (OTCMKTS:MRSKY) (+52bps), Toyota Motor Corp (ADR) (NYSE:TM) (TYO:7203) (+34bps) and D.R. Horton, Inc. (NYSE:DHI) (+20bps) were outweighed by the  detractors, the worst of which were Sports Direct International Plc (LON:SPD) (OTCMKTS:SDIPF) (-83bps), Barclays PLC (ADR) (NYSE:BCS) (LON:BCS) (-28bps) and Delta Air Lines, Inc. (NYSE:DAL) (-13bps).

? The short book returned +1.2%. At the stock level, this was primarily  due to positions such as adidas AG (ADR) (OTCMKTS:ADDYY) (ETR:ADS) (+30bps), Apr Energy PLC (LON:APR) (OTCMKTS:APRYY)(+24bps) and  Royal Bank of Scotland Group plc (ADR) (NYSE:RBS) (LON:RBS) (+17bps). The main negative contributors  were Ashmore Group plc (LON:ASHM) (OTCMKTS:AJMPF) (-27bps), Peugeot SA (ADR) (OTCMKTS:PEUGY) (EPA:UG) (-23bps) and Yara International ASA (ADR) (OTCMKTS:YARIY) (STO:YARO) (-14bps).

The chart of the largest positions can be found below

Screenshot_963

Crispin ends off the letter noting that we now live in an unusual world  of both low volatility and low liquidity. Perhaps it is time to  start selling risky assets if QE has done all it can do.