Odey: China Market Burst Threatens Entire Economy

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Odey takes an interesting view on the Chinese stock market and its relation to the economy. See the full letter below.


Odey International Fund monthly commentary for the period ended June 30, 2015.

The Odey International Fund returned +0.3% in May versus -2.9% for the MSCI World Index Daily TR Net Local.

Since inception on 29th July 2014, the Fund has returned +7.6% versus +7.6% for the benchmark index.

Performance Overview

  • In June-15 the Fund returned +0.1% against the MSCI Daily TR Net Europe return of -4.6%.
  • Positive performance came from our holdings in sectors including Materials (+1.4%), Energy (+1.0%) and Health Care (+0.5%); however, holdings in the Information Technology (-1.5%) sector disappointed.
  • Individual best performers this month were Sands China (+0.6%) and Ashmore Group (+0.6%), the worst were Alcatel-Lucent (-0.4%) and Ericsson LM (-0.4%).

Odey International Fund

Odey International Fund – Manager’s commentary

Germany agrees to let the Greeks survive. The Greeks get another €90 billion of help to add to the €320 billion they have already snaffled. The Germans can only agree on the basis that the original loans are not in default, thus preserving the fig leaf that Europe is not undermining its Maastricht principles. Provided that the Greeks receive €90 billion they can afford to pay €16 billion of interest on their €320 billion of loans. The can is kicked further down the road. The French government will use this opportunity to go for an integrated fiscal and monetary and political European structure. The Germans have always wanted this, but with the proviso that erring governments would be forced to comply with the new Government of the Centre. This is not a perfect moment to be calling forth this child.

Odey International Fund

China seems to have been having problems of their own, but when you investigate you find that in both Europe and China, credit has been the policy lever of choice for over two decades. Where Greece is bust, so are many of the outlying provinces in China, where totally inappropriate building works have been going on. Banks in these areas have non-performing loans of 15%, but also capitalised interest loans of 45% of balance sheet. It is important that these loans are taken on by the state in order to reboot the system, but the state is more concerned with taking on board the local government debt, another large problem. China is now facing a stock market bust that threatens consumer spending, a slowdown in capital spending driven by massive overbuild of shadow housing and overspend and continual wage growth at the bottom. With lending now through 3x GNP and evidence of increased capital flight, one would expect the Chinese government to devalue but nothing is going to be done before the IMF’s decision on reserve currency status for the Reminbi. That means there will be no devaluation for now but almost certainly devaluation after October/November.

Odey International Fund

Will this be a hot summer? It looks very much as if all decisions, including the raising of interest rates in the USA, are tabled for the autumn. That does not mean that after a near 9% rise in the European stock markets on the back of the Greek resolution, we are not going to see markets suffer for choice.

Odey International Fund

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