The London-based Michael Hintze, founder of the hedge fund CQS, has just sent out his-end-of-year thank note to his investors, looking ahead to 2015.
Sir Michael, a mathematician, a former Australian army officer, a billionaire philanthropist and one of the world’s most successful hedge fund managers, believes the impact of easy money is starting to fade as the US slowing tightens monetary policy.
He’s also strong on the US dollar, worries about the Eurozone and believes volatility will create some good opportunity in 2015.
“There are many crosscurrents globally in terms of economic growth, central bank policies and geopolitical risks. While the completion of Taper in the US is in effect a tightening of monetary policy, Governor Yellen’s Fed will likely be accommodative and ‘behind the curve’ as it relates to any interest rate hikes and the central bank policies of China, the Eurozone and Japan continue to be positively accommodative. We believe the US dollar should continue to strengthen. The near 40% fall in Oil prices over the last six months should be supportive of global GDP growth in the medium-term. In addition to being supply-led, it may also be a reflection of weakening end-demand and add to the deflationary bias, which we believe will likely create cause for concern among more indebted countries in the longer term. Geopolitical issues also continue to threaten stability.”
He’s concerned about the contagion risk of a geopolitically significant event.
“I continue to be concerned about the potential fallout in response to a worsening of international relations between Russia and Europe and the US,” Sir Michael, a fluent Russian speaker, says.
“One could take the view that QE (quantitative easing) has muted the markets’ reaction to the situation so far. I discussed my concerns about Russia extensively in my previous CQS Insights and it’s a situation we need to monitor carefully.”
He lists a slowdown in China and China’s Shadow Banking plus the Islamic State as significant risks.
Sir Michael says he thinks the US dollar will continue to appreciate against most major currencies due to the end of QE and the fact that it remains the global reserve currency.
“One needs to be mindful of its impact on US dollar issuers, especially from the developing markets,” he writes. “The portfolios I manage continue to be long US credit names with a tenor of 2-to-4 years reflecting my constructive view for the US in the medium-term.
“Reflecting my concerns over Eurozone fiscal imbalances and regional geopolitical issues, I am short European credit names with a tenor of around five years.
“There are also substantial opportunities being presented by European bank deleveraging, especially at the more illiquid
end of the spectrum.
“I look forward to an interesting year ahead which I believe will be punctuated by greater volatility and a return to dispersion. This should create opportunities on both the long and short sides and I believe we have the tools and experience to navigate markets for the benefit of our investors.”