China’s GDP growth has tapered off, growing 7.6% in the second quarter versus previous rates of over 9%, and Clunie believes the country could be in for a hard landing.
In view of this, the manager has shorted companies he feels suffer from a slowdown in China.
‘Luxury goods – there is enormous demand out of China,’ said Clunie. ‘Mulberry is a luxury stock that did well in the late 1990’s. Luxury stocks do well when there’s quick wealth creation.
‘So with the correlation between China consumer spending and luxury property prices – it is a natural short.'
He added: ‘Mulberry has had a massive deceleration. Burberry has also slowed down – growth isn’t coming out as well as they’d hoped.’
Earlier this year, Mulberry shares soared to £25 and now hover at around £14. Clunie said he shorted this firm at £20 and then added to his short, in the view it was ‘massively over-priced.'
‘China residential property has been in a big bubble – transaction levels have collapsed, and China’s growth is cooling,’ added Clunie.
‘It’s risky, shorting and waiting until there are losses [in a company],’ said Clunie. ‘You need to be well-informed, arguably better informed than the long book. So I look for where short-sellers have a high appetite.
‘We use fundamental analysis to see if stocks are over-priced. We look at stock lending data – do people agree with us when you see over-priced stock?’ he added. ‘We then wait to see if others short, and then we short. When you move as a pack, there’s more power and delayed arbitrage.’
‘[BAE Systems] it’s got a high yield of around 7%, and looks cheap, because British defence spending cuts are being priced in,’ he said.
BAE recently saw the planned cuts, which were in line with their budgeted cuts, said Clunie, making the stock cheap with the cuts more than priced in.
‘BAE’s rivals have higher price to earnings ratios and are more American. So this is an out of fashion value stock with high yield,’ he added.is also cheap because the market is concerned some of the patents are coming off, said Clunie. ‘It’s unfashionable and cheap, so I’ll take it,’ he added.
Over three years, Clunie has delivered 34.93% on his fund, compared with Libor three month’s 2.48%.