Crispin Odey believes 2014 will be a year for hedge funds rather than long-only with the stock market set to get a lot more selective.
In a note to investors in his £1.7 billion Odey European fund, he said although he expects growth to surprise on the upside, particularly in the US, interest rate rises will introduce a new set of challenges.
‘This is the year, especially in the US, where growth should surprise on the upside. With that will come questions about how quickly interest rates might normalise,’ Odey said.
‘We have often written about how overdue the replacement cycle is. Is this the year when orders blow the socks off forecasts? We think it is but we have thought so for a few years now.’
Although this may sound bullish on the face of it, Odey questions the duration of the upturn, saying house building will be the key indicator to watch. He said the improvement in the housing market has been driven by the fall in prices in the wake of the financial crisis and the low cost of money. To sustain this, he said consumer confidence needs to improve markedly.
‘Enduring demand will be driven by people feeling that employment prospects are sufficiently buoyant and wage rises reassuringly likely that it is worthwhile creating new families (and borrowing the money to buy the house),’ he said.
‘Is this likely? US house builders on 10x EV/EBIT against 13 x EV/EBIT in the UK tell you that US investors are still not believers.’
Despite this cautiousness, he believes investors can still make attractive returns this year because there is ‘enough in the soil and in the air to grow what we want’. However, he says investors will need to be far more selective.
‘A world which grows produces different problems, and rising rates, even if in real terms they are falling, will paid to the more idle speculative bubbles around,’ he said.
‘A year more for the hedge funds than the long equity funds, I suspect.’
The Odey European fund was up 25.8% in 2013, compared to the MSCI Europe's 19.9% rise.