Prem Watsa Answers What Will Change Your Mind About Those Equity Hedges?


Prem Watsa on Fairfax Financial Holdings Ltd (OTCMKTS:FRFHF) (TSE:FFH) call. Prem Watsa discusses equity hedges, GMP growth in the U.S., Fed’s tapering and opportunities in China (he has been bearish for a while). Also see: Prem Watsa “China Reminds Me Of US Housing In Boom”

Unknown Speaker*


The question is, you’ve had your equity investment portfolio hedge, essentially, since 2010. Based on your diagnoses of the dreadful economic situation underlying the apparently better numbers that economies throughout. I guess, also, in terms of your concerns about evaluations.

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Now, my question is — what will change your mind about those equity hedges? What would make you feel more (inaudible) about investing in equities or about hedging your equity portfolio?

What would give you a scenario, what would be those concerns?

Prem Watsa

That’s a very good question and one that we, of course, review all the time.

We might, as time goes by, just model through, so that the United States grows 2% or 1.5%, something like that. Europe, models through and China also, you know all the problems in China. We talked about it at the annual meeting. It will muddle through. In that case, we won’t have any problems, any unintended consequences. Our hedge will slowly come off. Right now, we haven’t increased our hedge, we haven’t reduced it, either. Our stock positions went up. Hedge positions for the same. Down down to 90% right now. So, that’s certainly is one possibility.

On the other side, you saw the first quarter GMP growth in the United States, very minimal. You saw inflation in Europe, about .5%. In the United States, in the 1% area. China, there’s lots of things happening in China. You can monitor them, in terms of the capital markets. What’s the default in the trust area in the wealth-management products and corporate bonds. A lot of changes. In the midst of all this, add the Fed tapers, meaning they no longer are buying government bonds. The long treasuries went down, as you know, in the last few days to 3.42%, below 3.5%. So, we look at all of this and wonder, you know, of we are going to muddle through and we might do that.

There is a possibility, of course, of unintended consequences. It might originate from China. They might originate in the United states. If we’ve got very low economic growth, almost no growth in the first quarter, many people say it’s because of the winter. If the second quarter comes in a similar way, I’m not saying it w ill, I’m just saying it might.

We might all wonder what the affects of QE, QE, and QE are. So, we take all of this into account and all of us have an investment committee and we wanted very carefully. Today, we are very happy with the position that we’ve got.

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