Renowned hedge fund manager Crispin Odey has warned that a US turnaround this year could spark a recession in emerging markets.
Odey warned that further pain is yet to hit the emerging markets, particularly those with current account deficits, once it becomes apparent that QE will come to an end on stronger growth in the US. He says the UK, with its growing current account deficit, may also prove dangerously positioned going into an election next year.
‘Our point is when the US turns around, that is when tapering will come to an end and that is when emerging markets have to have their recession - although not all of those are running large current account deficits. The UK also seems a dangerous place to be running into the election next year,’ he said.
He uses South Africa as an example, where in spite a weakening rand more recently he says there is still no real evidence of any ‘shake-out effect’.
He explained: ‘QE has allowed a country like South Africa to run a current account deficit that is funded by negative real rates for as long as they wanted. What it tells you is there will be a continued run on the rand until they are forced to raise interest rates and have a domestic recession, as there is no good reason at the moment for people to invest in that country.'
In Odey’s view there are many countries like South Africa, which he says ‘don’t yet understand how the world has changed and they won’t really change until the US turns around and starts to grow’.
On the back of his view of a US revival, Odey rebuilt positions in US housebuilders during the third quarter of last year and says he is still seeing upside at current valuations.
Pointing to Warren Buffett’s prediction that the US return to 1 million housing starts per year, which is below his forecast of 1.5 million, he says that a price to earnings ratio of five to six times for US housebuilders ‘is just a bit too cheap’.
Odey was allotted seven million shares in AO’s IPO, having applied for 40 million. ‘It was very difficult to see how they would not do well. The question was how well they would do.’
Delta Airline, Sky Deutschland, GKN and CF Industries feature in Odey’s long book. The fund manager’s short book includes inventory names he believes are breaking down as the bull market runs out of steam. These include stocks with emerging markets exposure such as Unilever, Ashmore, Coca Cola, Procter & Gamble alongside Aberdeen.