June 17, 2013

Hendry: Japan's return is bad news for the global economy

Hugh Hendry believes that Japanese equities will continue to go up in 2013 but he also increased bets that Japanese recovery will have harmful effects on other sovereign bonds. He has bought TOPIX index futures and shares in Japanese property companies to exploit the weakening currency. But Hugh Hendry, same as Jim Rogers said that Japan's initial success at revitalizing its economy will be someone else's loss. "Japan's monetary pivot towards QE will not create economic growth out of nothing. Instead it seeks to redistribute global GDP in a manner that favors Japan versus the rest of the world. This is the last thing the global economy needs right now," Hendry said.

The manager pointed to PMIs that suggest business activity is again slowing, and said the combination of this trend and a resurgent Japanese export sector "does not bode well for economies in Europe and the rest of Asia".

Hendry said he has started buying short-dated sovereign bonds from issuers in Australia, Europe, Korea, Switzerland and the US.

Other investment themes

Hugh Hendry has been buying US blue chips, focusing on those with the least debt on their balance sheets.

"Given our longstanding caution regarding the prospects for the global economy, we have looked to express equity risk by being long cash generative businesses with the strongest balance sheets and the least economic sensitivity," he said.

After bank accounts confiscation, bonds with no yieleds and gold going down, people worried about inflation it seems that the stock market might start its next asset bubble as money has nowhere to go.

"It could be argued that for such an investor, all roads lead to the safest, least volatile, most liquid consumer non-discretionary blue chips on Wall Street, which provide a 3% dividend income payable in dollars."

A long trade on the USD has also been a major position for the Eclectica fund, with Hugh Hendry highlighting the relative strength of the US economy as a major investment theme in the portfolio.

He says that unlike many other countries, the USA has dealt with its housing bubble, recapitalized banks, and took the pain as wages there went down while in Asia up. Not only is this but shale gas providing temporary boost to the USA productivity and industry.

Hendry also stated that the dollar has become less negatively correlated to the performance of the stock market, in a break from its recent correlation traditions.

"It is too early to draw anything firm from this, but the sight of the stock market and the dollar rising in tandem looks more like the regime which accompanied the last two dollar bull markets of 1980-1985 and 1995-2001," he said.

Hugh Hendry is a fund manager at Eclectica Asset Management. He has become prominent in the United Kingdom for his commentary on the financial crisis. Hendry has been referred to as "the most high-profile Scot in the controversial (Hedge Fund) sector."