Crispin Odey, founder of Odey Asset Management and backer of the Vote Leave campaign, told clients to prepare for a recession and higher inflation in the wake of the Brexit vote.
Odey, who is worth around £1 billion, blamed the Bank of England’s policy of low interest rates for exacerbating Sterling’s post-Brexit fall and the resulting inflation from the higher cost of imports.
Bank of England Governor Mark Carney, who announced on Monday he would remain at his post until 2019, would face more pressure to raise rates to halt Sterling’s slide in the wake of the UK’s vote to leave the European Union, Odey said in a letter to clients detailing his fund’s performance in September.
“Traders have been buying into sterling weakness on the back of an 18% fall in the trade weighted index since the Brexit vote, but do they not understand that the further the pound falls, the greater the difference between next year’s inflation rise and today’s interest rates,” Odey said.
“Sterling is getting more expensive, the further it falls. Carney is really under pressure and should be raising interest rates, but it now looks as though a rise in interest rates will be over his metaphorical dead body. We are now destined to have a recession in the UK as well as inflation.”
Odey’s Opus fund grew 1.1% in September. That’s less than the 1.4% returned by the MSCI benchmark of global stock markets in the same period, according to the letter.
Sky (+0.5%) and Randgold Resources (0.3%), were the fund’s biggest winners, Pendragon (-0.3%) and Barclays (-0.1%) it’s biggest losers. Year-to-date the fund is down 19.5% against the MSCI benchmark.
Odey also said that the recent highs in the FTSE 100 were “unsustainable” and that loose monetary policy from the Bank of England would do little to prop up valuations in the future.
Odey was one of the Vote Leave campaign’s more prominent backers, along with Phones4U founder John Caudwell, and Reebok founder Joe Foster. The campaign was linked with politicians such as UKIP MP Douglas Carswell and Conservative MP Steve Baker.
The Daily Mail reported earlier this year that James Hanbury, a fund manager at Odey Asset Management, made £110 million betting against the pound as it plunged on news that the UK had voted to leave the EU in the June referendum.
Here is the full text of Odey’s note to clients:
“These times are getting interesting. The FTSE 100 share index is now up 30% over five years, whilst earnings have fallen by 80%. On an earnings yield of 1.6%, the stock market could fall by 80% and, provided profits did not fall, would be on a 13x P/E multiple. The Bank of England is proud that they have engineered such a pleasant result but there is now increasing evidence that this is unsustainable.
“On the back of the uncertainty for overseas investors in UK PLC following on from the Brexit result, the current account deficit is ballooning and the budget deficit is following. Carney, the Governor of the Bank of England, has responded by flooding the money markets with more cash, QE, and in the process supporting the government 10yr bond at a current yield of 1.2%.
“However, as sterling falls against all its trading partners’ currencies, it is mechanically ensuring that inflation rises up through 3.5%. Traders have been buying into sterling weakness on the back of an 18% fall in the trade weighted index since the Brexit vote, but do they not understand that the further the pound falls, the greater the difference between next year’s inflation rise and today’s interest rates.
“Sterling is getting more expensive, the further it falls. Carney is really under pressure and should be raising interest rates, but it now looks as though a rise in interest rates will be over his metaphorical dead body. We are now destined to have a recession in the UK as well as inflation.
“It will be difficult for the stock market to remain above all of this. What QE has done is to make investors complacent but also optimistic that only an upturn in economic activity, spelling higher profits could trigger upward interest rates. What the UK is promising is rising wages, recession, inflation and falling profits. Not exactly the prize that ticket holders in the FTSE and the gilt market have paid up for.”