Hugh Hendry march letter.
Also see Hugh Hendry: We’re Going To Be In A ‘Mad Max’ World If China Listens To The Hedge Funds
Performance Attribution Summary
• The Fund returned -1.9% in February.
• Equities lost -1.1%, with European positions responsible for the large majority of losses as the market declined a further -3.3%. Losses were partially offset by a short position in index futures and profits from German property companies which again bucked the overall trend.
[drizzle]• Japanese equity holdings were flat in aggregate with gains from positions in REITs neutralised by losses on our short steel/long broader index RV (before it was closed out early in the month) and our low volatility basket.
• Fixed income cost -0.4% as our Chinese interest rate positions gave back recent gains (-0.9%). Our special situation play in Sprint corporate bonds (described below) however recorded a gain of +0.5%.
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We reason that with monetary policy at warp speed the opportunities to make money on this cross are plentiful. If one region successfully loosens policy yet the other doesn’t then we could potentially see large moves. If both choose to loosen then what with the bureaucratic practices of the ECB and their insistence that they only respond once their in-house research team confirms that the facts have changed then it seems likely that policy announcements will not be choreographed at the same time. If this proves correct we will see large opportunities to make money owing to fluctuations in the cross rate. Of course if neither chooses to act, either owing to a lack of consensus and/or political willpower, or (what I would term the “silly season” argument) that they are out of ammunition, then the volatility premium should increase as market participants express their disappointment. Regardless, going in to warp speed you need to be long volatility at the right price.
And if we are truly “going beyond known space to uncharted, exciting new worlds”, I have to commend the Richard Koo theory that suggests aggressive monetary policy is perhaps better suited to deficit countries (the UK, US and peripheral Europe) rather than sovereign creditors like Germany and Japan where it makes their currencies even more competitive and returns you to the conundrum of the last cycle of mercantilism which we have argued repeatedly lies at the heart of why stock markets on a risk adjusted basis have horribly underperformed their domestic bond markets for several decades. Arguably central bank financed Japanese fiscal policy enacted by abolishing the consumer tax (not hiking it further) and likewise something similar from the Germans but of course without the assistance of the Bundesbank would be the best way to reflate global demand as opposed to this cul-de-sac of just easy money indeed aggravates further, the corrosive creep of German mercantilism which keeps the continent unbalanced and fragile. For now German households can rightly claim that they have less wealth than say their French and Italian equivalents and therefore it is unfair to demand that their government spend more when they are presently in catch up mode. To us however it seems that Germany is one of the few places globally where a federally stimulated house price bubble would be very beneficial and would quickly remedy the wealth-income disparity with its other European partners.
But of course I am talking my own book as you know that our single largest line exposure in the Fund is German property stocks which are valued on cap rates of 6% in a negative rate environment and where there may soon be a shortage of housing in the larger German conurbations. It feels like a no brainer.
