Hugh Hendry predicts crisis will spread to Asia

(Reuters) - Hugh Hendry, one of the hedge fund industry's most outspoken managers, has warned that the economic crisis is headed for Asia, with the region's largest economy, China, struggling under a bursting property bubble and tumbling demand for its exports.
Hendry, who runs Eclectica Asset Management, which has around $700 million in assets, said in his first investor letter of great length since the winter of 2010 that he was "more pessimistic on Chinese growth than ever."
"This makes us bearish on most Asian stocks, bearish on industrial commodity prices, interested in some US stocks, a seller of high variance equities and deeply concerned that Japan could become the focal point of the next global leg down," the manager said in the April-dated letter obtained by Reuters.
He cites Japanese group Hitachi as "too expensive" whilst buying 5-year CDS on Toshiba.
Scotsman Hendry, who is well-known for his contrarian, bearish bets on markets, has in the past profited from his stance on China.
Last year his Credit Fund grew 46 percent after buying credit protection on Japanese stocks exposed to Asia's largest economy.
Hendry said in the letter that some Japanese companies are "corporate zombies" which will sooner rather than later fall prey to over exposure to Chinese exports, high leverage and opaque and bloated balance sheets.
"It is hard to escape the impression that Japan's blue-chip companies are teetering on the brink of extinction," he wrote.
At the heart of Hendry's concerns about China lies his belief Beijing has presided over a massive property bubble while allowing government debts to grow too large.
The country will also struggle to maintain its export-supporting currency peg with the U.S. dollar just as a slowdown in European growth crimps demand for its goods.
"It has long seemed to us to be the case that this economic crisis would start in the US and make its way to Europe. That has happened. However, we also think it will end in Asia," he said in the letter.
Hendry hit the headlines in 2009 after posting videos on YouTube after he travelled to China to film empty office buildings to support his argument about a real estate bubble. In the letter he also promises "no more YouTube videos."
Hendry also said he was more bullish than most about U.S. growth prospects, believing price restructuring in debt and labor markets as well as huge advances in shale oil extraction will maintain the economy's position as the world's largest.
Eclectica did not respond to requests for comment.

Hugh Hendry predicts crisis will spread to Asia

* Outspoken manager warns on Chinese growth
* Says crisis headed Asia's way, focus on Japan exporters
* More bullish than most on U.S. economy
By Tommy Wilkes and Anjuli Davies
LONDON, May 3 (Reuters) - Hugh Hendry, one of the hedge fund industry's most outspoken managers, has warned that the economic crisis is headed for Asia, with the region's largest economy, China, struggling under a bursting property bubble and tumbling demand for its exports.
Hendry, who runs Eclectica Asset Management, which has around $700 million in assets, said in his first investor letter of great length since the winter of 2010 that he was "more pessimistic on Chinese growth than ever."
"This makes us bearish on most Asian stocks, bearish on industrial commodity prices, interested in some US stocks, a seller of high variance equities and deeply concerned that Japan could become the focal point of the next global leg down," the manager said in the April-dated letter obtained by Reuters.
He cites Japanese group Hitachi as "too expensive" whilst buying 5-year CDS on Toshiba.
Scotsman Hendry, who is well-known for his contrarian, bearish bets on markets, has in the past profited from his stance on China.
Last year his Credit Fund grew 46 percent after buying credit protection on Japanese stocks exposed to Asia's largest economy.
Hendry said in the letter that some Japanese companies are "corporate zombies" which will sooner rather than later fall prey to over exposure to Chinese exports, high leverage and opaque and bloated balance sheets.
"It is hard to escape the impression that Japan's blue-chip companies are teetering on the brink of extinction," he wrote.
At the heart of Hendry's concerns about China lies his belief Beijing has presided over a massive property bubble while allowing government debts to grow too large.
The country will also struggle to maintain its export-supporting currency peg with the U.S. dollar just as a slowdown in European growth crimps demand for its goods.
"It has long seemed to us to be the case that this economic crisis would start in the US and make its way to Europe. That has happened. However, we also think it will end in Asia," he said in the letter.
Hendry hit the headlines in 2009 after posting videos on YouTube after he travelled to China to film empty office buildings to support his argument about a real estate bubble. In the letter he also promises "no more YouTube videos."
Hendry also said he was more bullish than most about U.S. growth prospects, believing price restructuring in debt and labour markets as well as huge advances in shale oil extraction will maintain the economy's position as the world's largest.
Eclectica did not respond to requests for comment.

Brookes adds Hendry fund

Cazenove Capital’s head of multi-manager Marcus Brookes has bought into a hedge fund from Eclectica star Hugh Hendry, as a hedge against volatility in Chinese stockmarkets.
Mr Brookes has bought into Mr Hendry’s Eclectica Hedge fund, which is also tipped by Aviva Investors’ multi-manager Peter Fitzgerald in this week’s magazine.
“It’s pretty much the most cautious fund we have in the Diversity range,” said Mr Brookes.
“This fund will make decent money if China has a wobble.”
Mr Hendry began raising concerns about a Chinese slowdown in 2009. In a letter to clients earlier this year he said he was more pessimistic on Chinese growth than ever.
This stance led him to be bearish on most Asian stocks and industrial commodity prices and interested in some US stocks.
Mr Hendry said he was also “deeply concerned” that Japan could become the focal point of the next global downturn.
The Eclectica fund makes up 3.1 per cent of the £808.2m Multi-Manager Diversity and 2 per cent of the £24m Diversity Income fund.
Mr Brookes said he believed rival investors were too optimistic on the future of China, and there is evidence to suggest that it will not lead the way economically in the next century as some experts expect.
“Investors may well have forgotten that big stimulus package in 2008 by the Chinese which is fading now,” he said.
“The Chinese managed to blow a property bubble just like the US and UK did.
“Also the demographics are poor and also the potential of a strong dollar is negative for country.”

The manager said he was also avoiding UK sovereign bonds.
“I would not put money in UK gilts,” he said.
“Something that is yielding roughly 1.9 per cent with inflation at 3 per cent is a concern.
“I would expect capital loss and would prefer to hold cash or cash equivalents.”

Hugh Hendry, Fund Returns And China’s Bubble

Hugh Hendry, the the famous China-bear, has been out of the media spotlight in recent times. However we’ve exclusively received his report on the performance of one of his major funds including his opinion on the future of Europe, China and the United States. Here’s our run down on the performance of the fund and his outlook on the global economy.
His fund, the Eclectica Absolute Macro Fund, has been up and running since December 2009. It can invest in the Global Equities, Commodities, Global Fixed Income, Currencies and Global Credit. The fund currently has £95.8 million Assets Under Management.
The Fund returned 1.7% in April on its Class A £ shares. So far in May the same shares have returned 0.7%. Since inception in December 2009, the fund has returned 12.1%.

 Long exposure to non-discretionary consumer businesses returned 28bps and short index positions returned a further 135bps. These gains were partially offset by losses from a long exposure to agricultural shares. Total equity returns were 1.5%.

On China Hendry is, as usual, pessimistic. His letter outlines several problems coming to a head in the country stemming from a low return rate on deposits that has led directly to mass investment in the real estate market. that investment has caused a real estate bubble in the country according to Hendry. The crisis he sees coming will devalue the renminbi as the authorities try to deal with the crisis.
There are implications of Weimar style hyperinflation coming in the report. It is not a solid prediction by Hendry but the inference is strong in comparison. On top of China’s troubles Hendry wants to short Japan based on the country’s lackluster performance in recent years and it exposure to China’s coming storm.
Hendry outlines three ingredients that make a good macro fund manager. The first is successful but contentious macro risk posturing, the second is the ability to pick assets with a high probability of payout and maintain an asymmetric loss profile, the third is an ability to respond quickly to changing performance in order to mitigate losses.
Because of his predictions on China and the crisis in Europe Hendry is long on the US Dollar and the British pound assuming there will be a return to value in the currencies as stores of value in the darker times to come. By the same logic he is short on the Australian Dollar as the appreciation in the currency, based on China’s resource buys, is set to fall if China fails. South Korea according to the fund’s holdings will also be vulnerable to the changes and he is shorting that country’s currency the won.
Hendry, in rhetoric at least, is betting big on China. His outlook on the global economy is a terrifying one but it is also very convincing. There is something perverse about betting on a second crisis in the worlds economy as it flounders in recovery but that’s what Hendry’s doing. The data, at least as he presents it, is in his favor and the compelling and simple idea, that China will crash, be left with little to instrument recovery and bring the rest of the world with it, is one that could capture public attention as China struggles with its growth.

China Skeptic Hugh Hendry Turns Bullish on U.S. Stocks

Hugh Hendry, whose Eclectica hedge fund returned 31 percent in 2008 betting against U.S. growth, turned bullish on the world’s biggest economy and repeated his concern that a real-estate bubble will derail China’s boom.
“We are more bullish on U.S. growth than most,” the 43- year-old Scot wrote in a letter to clients last month that was obtained by Bloomberg. “We are also more pessimistic on Chinese growth than ever. This makes us bearish on most Asian stocks, bearish on industrial commodity prices, interested in some U.S. stocks, a seller of high variance equities and deeply concerned that Japan could become the focal point of the next global leg down.”

Japan may be the developed economy most hurt by a Chinese slowdown, he said. Hendry gained prominence for saying that he was proud to have profited after the collapse of banks in 2008 and his public arguments with European politicians who blamed hedge-fund managers for exacerbating the financial crisis. He now says that the economic malaise that started in the U.S. with the bankruptcy of Lehman Brothers Holdings Inc. more than three years ago is poised to wreak havoc on Asia.
“It has long seemed to us to be the case that the economic crisis would start in the U.S. and make its way to Europe,” Hendry wrote, calling the April note the longest letter he has sent to his investors since the winter of 2010. “That has happened. However, we also think it will end in Asia.”
Chinese Boom U.S. prospects have brightened amid discoveries of shale gas and more acceptance of the need to reduce debt and wage levels, Hendry wrote.
Hendry, who founded London-based Eclectica Asset Management LLP in 2002, didn’t return a phone call or e-mails seeking further comment. As of April 13, his Eclectica hedge fund had fallen about 1.7 percent in 2012 after rising 12 percent last year, according to data compiled by Bloomberg. He manages a separate hedge fund that tries to protect investors from market shocks, which surged about 46 percent in 2011.
According to Hendry, Chinese authorities triggered a real- estate boom by forcing banks to pay low interest rates on deposits. Citizens then sought better returns by speculating on property using money borrowed through “underground lending,” he said.
The Asian country is also being hurt by the European sovereign debt crisis as slow growth and austerity measures imposed by the region’s politicians crimp the buying power of China’s largest export market, Hendry said.
“We might soon come to question whether China is going to be able to maintain its currency peg to the dollar,” he wrote. “When we look to at where the next market crisis will come from, we should be looking to China. There is a near consensus that China will supplant America this decade. We do not believe this.”
Toshiba, Hitachi Hendry, who has been bearish on China since at least 2010, has been a buyer of credit-default swaps on bonds issued by Japanese companies that benefit from Chinese growth. The contracts become more valuable when investors become more concerned that a company will default on its debt.
In his April letter, Hendry said he’s bought CDS on Toshiba Corp. (6502) and called the shares of Hitachi Ltd. (6501) “too expensive.”
“Japan is the most industrially exposed economy there is to a Chinese slowdown,” Hendry wrote. Once Chinese growth has “unmistakably faltered,” Japanese companies will be downgraded and no longer able to sell “cheap equity to their much abused shareholders. Then we will have entered the crisis and resolution chapter.”
Hendry gained attention for his negative view on China in 2009 when he posted videos on YouTube in which the fund manager toured cities and highlighted office buildings that he said had no tenants. In last month’s letter, Hendry promised “no more YouTube videos.”