Man Group Plc (LON:EMG) (PINK:MNGPY) (PINK:MNGPF) is one of the largest hedge funds in the world. Based out of the United Kingdom, the firm manages $close to $60 billion dollars. The firm takes a long term oriented investment approach.
The hedge fund summed up their concerns in a recent note. The firm expressed concern amid the growing likelihood of Spain seeking a bailout and uncertainty over the strength of the US and Chinese economies. These fears overshadowed other reassuring news from the US such as the better than expected March US retail sales and positive first quarter corporate earnings announcements. Against this backdrop, the fund sustained a modest loss, weighed by the stocks, currencies, energies and credit sectors while the bonds sector provided some uplift.
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The fund was down 0.3% for the week. The hedge fund seems to be positioned for a bearish enviroment as described below:
The view is interesting especially in conjuction with a document which ValueWalk obtained from the fund. The fund is so unsure about what to think that they let two analysts debate the topic. The document discusses the debate between two members of the firm, semi-bear versus super bear. The super bear was Jamil Braz, chief investment strategist of GLG Partners (a wholly owned subsidiary of Man Group Plc), and the semi-bear was Ben Funnell, Chief Equity Strategist of GLG Partners.
Jamil stated that The US total debt to GDP ratio was 350% back then and, after a raft of central bank intervention, it remains close to that level now. Leverage is a more important issue rather than Europe. Even if a resolution is found to the Eurozone crisis, which Jamil describes as the ‘urgent issue’, the fundamentally necessary and painful deleveraging process has yet to begin.
Jamil feels that risky assets will be buried during the period ahead and noted that the prevailing equity risk premium (of approximately 2.5%) is simply not sufficient to justify investing in equities.
Ben stated that Greece is in the midst of a similar scenario to the US Great depression,when looking at industrial output.
In terms of the valuation of equity markets, Ben noted that it is misleading to look at the current P/E ratio (which suggests that equity prices are not too stretched) because we are certain to see negative earnings revisions in the period ahead. Instead, Ben firmly advocates the use of the Shiller P/E measure, which compares today’s share price to trailing 10-year earnings (thus removing cyclicality). On this basis, US equities look really expensive at a reading of 19 (now closer to 23) while Europe appears to offer better value on 12. In fact, should European stock markets fall around 30% from here the opportunity in equities would begin to look incredibly compelling on a Shiller P/E basis.
In economic terms, there are two very significant forces at work and they appear to be firmly on a collision course. Deleveraging is hugely deflationary while quantitative easing is extremely inflationary. The conclusion is that Central banking is having a massive effect on investing.
However, he then asked the audience if they were bullish. Only 6% of attendees were bullish.
Ben pointed out that this is indicative of sentiment in the of long-only managers being ultra cautious while long/short managers are typically only utilising 50% of their risk budgets. Ben suggested that simultaneous quantitative easing on the part of the Bank of England, the Federal Reserve, the Bank of Japan, the Swiss National Bank and the European Central Bank could provide the catalyst for a significant short-term rebound in equity prices. In
fact, a more enduring and robust rally might occur if any initial upward movement were to inspire a shift in sentiment and portfolio positioning. Ben therefore concluded that it was potentially a dangerous time for investors to be ‘short’ risk. In sum, don’t fight the Fed (BOJ, SNB and ECB)!
In conclusion, Man Group is unsure about the short term but is very bearish over the long term.