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.”