Chris Levett’s $4 billion commodities fund, Clive Capital, is up nearly 10% YTD through October.
According to a recent letter to investors, the fund is up 9.61% following 7.7% returns in October, its best month this year although it has has been on a tear since July, when the fund reversed its 3-month trend of negative returns that began in May (when it was down 6%).
Levett is a great guy to pay attention to right now because commodities are a big story this year – almost everyone expects them to rise because demand is increasing in quickly-developing nations like China – and he’s killing it.
Levett, 40, comes from Moore Capital, where he was a trader until 2007, when he started UK-based Clive Capital. A year ago in November 2009, Clive had returned 17% YTD and 79% since inception, and Levett closed the fund to new investors.
Below is an excerpt titled “Macro Review” from Clive’s recent letter to investors. The fund reviews G20, QE2, why its bullish on China, and its take on what’s happening in Russia and Brazil.
Throughout October the markets were absorbed with debate over the prospects for renewed Quantitative Easing in the US (and possibly other countries) and headlines over ‘currency wars’ going into the G20. In the end the G20 made limited progress, as expected, save for proposing an eventual (and overdue) increase in the representation of the emerging markets at the IMF (again demonstrating their increasing significance for the global economy) and at the margin making it politically less acceptable for large surplus countries to engage in significant competitive currency devaluations. Similarly, although expectations chopped around all month, by month-end the market had settled on expectations that the Fed would initially increase the size of its asset purchase programme by $500- $600 billion over the next 6 months at the November FOMC and review thereafter.
The Fed’s decision to further ease financial conditions, the potential that Japan and the UK may eventually follow suit, and the resultant de facto easing of financial conditions in much of the emerging world is set to support the continuation of the firming growth path of the global macro economy. While activity momentum in many parts of the developed world remains sluggish at this stage, it now seems clear that the global economy has troughed. Into year-end the US looks set to settle into a period of sub-trend but stable growth and thereby avoid a double dip, the Eurozone increasingly seems likely to outperform expectations from earlier this year and, most importantly, EM growth is becoming increasingly supportive. China has now passed through its (policy-induced) soft patch and looks set to accelerate into 4Q10 and further beyond with the October manufacturing PMI showing activity is now expanding at a rate last seen in April. Policymakers’ confidence in the prospects for the Chinese economy was clearly demonstrated by the PBoC’s decision to hike the reference interest rate by 25bps this month, the first rise since December 2007. This therefore also implies that global growth will begin to pick up in the near-term, led by the dynamic EM world.
In many ways the Fed’s policy action was successful even before the new round of QE was formally announced. Since the September FOMC made clear that a further round of QE was on the agenda, the bond curve flattened significantly with the yield on 10yr Treasuries dropping from 2.70% to a low of 2.39% by the second week of October, the S&P 500 is 3.8% higher and the USD more than 5% weaker against the EUR and 4% weaker on a trade weighted basis. Although concerns later in October that the Fed might end up being less dovish than expected drove a 20bps rally in the 10-year yield into month-end, the QE extension should anchor the yield curve at lower levels going forward with the resultant easier financial conditions supporting activity.
The US 3Q10 real GDP print suggests that the economy has settled into a sub-trend but expansionary phase, with headline growth increasing to +2.0% QoQ saar from +1.7% QoQ saar in 2Q10. Although inventories made a strong contribution to the headline (for the fourth consecutive month), the main upside surprise came from personal consumption which increased +2.6% QoQ saar, the sharpest rise since 4Q06. This GDP print together with a strong increase in the October manufacturing ISM, suggests that activity may now have troughed and a double-dip now seems to be a remote probability. The ISM showed that activity rebounded in October to expand at its sharpest rate since May (supported by new orders which also increased at their strongest since May). While this suggests some upside risk to manufacturing, overall activity is likely to remain subdued in the near-term, particularly in the service sector which has lagged to date.
The labour market remains key to further gains, and while it seems set to weigh on consumer sentiment and spending in the near-term, the move lower in initial claims and positive (if modest) private sector non-farm payrolls gains are encouraging signs of potentially supportive development even as the September personal income report shows wages and salaries stagnated on the month. Business equipment spending has also proved very supportive thus far and while momentum has waned in 3Q10 it remains above trend with non-residential fixed investment increasing +9.7% QoQ saar in 3Q10 against a 10-year average of +1.0%. Finally recent data suggest that housing market is showing tentative signs of stabilisation, albeit at weak levels.
Activity in the Eurozone remains robust at this stage and further upside surprises have encouraged several commentators to revise their expectations for 2010 growth higher against previous expectations of a more pronounced weakening of momentum through 4Q10. The October flash manufacturing PMI recovered some of the small setback in September while the services PMI pushed lower as a result of a weak, but still reasonably expansionary, French reading. Consequently, the composite PMI continues to point to solid 4Q10 growth of around 0.4-0.5% QoQ which would leave momentum only marginally weaker than the +0.65% QoQ sa growth in 1H10.
The solid PMI readings show two important developments that suggest that growth momentum can be will be maintained going forwards and has the potential to surprise to the upside. Firstly the recovery of the new orders component of the manufacturing PMI suggests that momentum may soften by less than expected in 4Q10. The sharp +5.3% mum sa rise in industrial new orders in August (led by orders of capital goods) also points to continued strength in the coming months with 3m/3m momentum still running at a very strong +5.7% and only slightly below the +7.9% cycle-peak in June. Secondly the German labour market remains particularly supportive with unemployment now at it’s lowest since 1992 and employment above pre-crisis highs. Strong business confidence, with the IFO rising for the fifth consecutive month and the headline and expectations sub-component close to all-time highs, suggests that hiring and therefore German domestic demand should remain very supportive going forwards. Consequently the -2.3% mum SA fall in German retail sales in October seems inconsistent with other available information and is likely to be an outlier.
Challenges will of course remain and a downgrade to Ireland’s sovereign rating by Fitch, contraction-ary PMI readings in Greece and Spain, controversy over fiscal austerity programmes as reflected by strikes in France and the initial inability to agree on a fiscal programme in Portugal are reminders of challenges to be faced. Even so, the emerging picture is one of a modest softening rather than more pronounced downturn in activity with the potential for core activity to surprise to the upside.
In the UK the main focus on the month was on the prospects for a renewed round of QE (with expectations that there was even a possibility of an announcement as early as the 4 November MPC meeting) and the extent of the austerity measures to be announced at the Comprehensive Spending Review (CSR). Expectations for an extension of QE were quashed after upside surprises from 3Q10 real GDP growth (which slowed much less than expected to +0.8% QoQ sa from the prior +1.2% QoQ sa) and a relative strong October manufacturing PMI reading which recovered some of the lost momentum since July on rising output and new orders (particularly new export orders). Nonetheless the CSR, which was largely in line with expectations, commits the authorities to an aggressive programme of cutting public expenditure by around £20 billion annually over the next four years (reducing the public sector deficit to 2.1% of GDP in FY2014/15). It seems likely that activity will be adversely impacted by the scale of these cuts and the upside surprise from the October PMIs is unlikely to be maintained. Further QE therefore remains a distinct possibility going forward. However, the longer that inflation remains sticky, and as the planned VAT hike in January should bias inflation prints higher in early 2011, the case for a QE extension will become more difficult to make which could leave policy makers with an extremely uncomfortable dichotomy.
While the Bank of Japan unsurprisingly left policy unchanged at its October meeting, it increasingly seems likely that monetary easing will be taken in the coming weeks as domestic and external demand continues to weaken (the latter exacerbated by current JPY strength). The BoJ’s decision to reschedule its next policy meeting to 4-5 November (11 days earlier than originally planned) likely reflects its intention to respond with easing measures should the JPY strengthen significantly after the FOMC meeting on 3 November. External demand actually held in better than expected in September with export growth increasing to +16.1% YoY (from the prior +14.2% YoY) on the back of increased machinery orders to the US but this seems unlikely to be sustainable. Meanwhile, the labour market made modest improvements on the month, with the unemployment rate falling more than expected (to 5.0%) and the jobs to applicant ratio posting its 5th successive rise (to 0.55x) both remain weak by historical standards. Although the sharp fall in September retail sales (at -3.0% mum sa, the largest fall in 10 years) overstates the weakness of domestic demand owing to the expiry of the autos eco points scheme, momentum is likely to weaken going forwards. This, together with weaker external demand, will weigh on the industrial activity and the -1.9% mum sa fall in industrial production in September (the weakest since February 2009) and a further weakening in the 3-month forward Tankan outlook suggests the risks are increasingly to the downside.
In EM space, developments on the month further confirmed our view that activity in China has now passed through a policy-induced soft patch and is set to accelerate into year-end. Of the retrospective data, real GDP growth momentum increased significantly to 9.6% QoQ saar in 3Q10 from 7.6% in the prior quarter. September activity data was robust across the board with strong growth in industrial production (which moderated slightly to 13.3% YoY from 13.9% in the prior month, but with momentum remaining positive at +1.0% mum sa), further evidence that investment is continuing to track strongly (rising a cumulative +24.5% YoY in the first nine months of the year after +24.8% in the year to August) and retail sales beating expectations as they rose +18.8% YoY (0.4pps above the prior month).
Even more significantly, the October manufacturing PMI’s show a marked acceleration in the pace of expansion hitting the highest rate since April after softening through the summer. This stronger headline was supported by a sharp rise in forward looking indicators with new orders also expanding at their sharpest rate since April. The sharp rise in new orders was all the more impressive given that new export orders lost a little momentum on the month, further confirming that Chinese domestic demand should continue to strengthen significantly going forwards. This will be encouraged by an emphasis on restructuring growth towards domestic activity in the 12th five-year plan.
Taken together, this all suggests that the Chinese economy is set to record strong gains through 4Q10. The PBoC’s decision to hike the reference interest rate for the first time since December 2007 exemplifies their confidence that activity is likely to strengthen into year-end and they remain cautious with respect to rising inflation (although price pressures are food-related at this stage) and controlling investment demand particularly in the property sector. Significantly, the PBoCs decision to widen the corridor between the 5-year deposit and lending rates (increasing the 5-year deposit rate by 60bps and the lending rate by 25bps) is also indicative of a move to increase the strength of the banking sector by encouraging the attraction of longer-term deposits and improving loan/deposit maturity ratios.
Activity across the rest of NJA also continues to point to a firming picture which will be supportive of global growth in the coming months. The latest manufacturing PMI for India shows that output not only remained expansionary for the 19th consecutive month in October, but that activity rebounded from the slight loss of momentum in September. Rising domestic new orders are also set to cause acceleration in momentum in the coming months. Similarly, while South Korea reported a very strong +29.9% YoY (+8.6% mum SA) increase in exports in October, a sharp +6.0% mum SA increase in imports is also indicative of a strong improvement in domestic demand.
Elsewhere in EM both Brazil and Russia continued to report significant labour market tightening as activity continues to strengthen. In Brazil the unemployment rate fell to a new low of 6.2%, while Russian unemployment fell to 6.6%, its lowest since October 2008. In the case of Brazil, the tighter labour market continues to reflect the impact of above trend growth which seems likely to encourage the COPOM to hike rates although it remains remarkably sanguine about inflation risks at this stage. The Central Bank of Russia is more likely to remain on hold for a prolonged period given the nascent stage of the recovery and with inflationary pressures largely food- based at this stage. However, a strong +9.4% YoY increase in fixed asset investment in September suggests that the corporate sector is set to record a strong recovery going forwards even as inflationary pressure weigh on real consumer spending.