Friday, July 24, 2009 2 comments ++[ CLICK TO COMMENT ]++

Thoughts on Hugh Hendry

I remarked recently that I ran across the Scottish CIO of Eclectica Asset Managament, Hugh Hendry, and was quite impressed by him. He reminded me of the first time I encountered Marc Faber, who incidentally had a huge impact on me. Like Faber, he is outspoken, quite controversial, and a bit arrogant (I don't like his arrogance though.) Most importantly, however, Hugh Hendry, like Faber, seems to have a good understanding of investment history. I would say that Faber knows a lot more than Hendry but Hendry seems good as well. Interestingly, Marc Faber and Hugh Hendry are both skeptical of central bank actions but they take completely opposite views: Hendry is a deflationist while Faber is a hyperinflationist (do note that they may change their opinions over time.)

I did some research on Hugh Hendry to see if he is actually someone worth listening to. Not being part of the hedge fund world or having access to his hedge fund letters, I am limited to his public writings and appearances. Here is my opinion of the man, right now.

Interviews and Writings

You can access some video interviews of Hugh Hendry from the Eclectica website. You can also access some articles by Hugh and his team from that site.

Investment Style

Eclectica manages some mutual funds as well as a hedge fund. The hedge fund is the one that is interesting to me because that is where Hugh can put his ideas into action. The mutual funds are limited and seem to be underperforming the market it seems (more on this later.)

Hugh Hendry is partly driven by momentum (but doesn't seem like a momentum-oriented trader or quantitative investor.) He has said in his interviews that they only take positions when the market is moving in a particular direction; and they sell if the market goes against them (I'm sure that I'm oversimplifying his strategy.) This is contrary to my investing style. In other words, people like me, who follow the classic value investing thinking, believe that the market is there to serve you and should be ignored if one can't find reasons to believe its actions. In contrast, Hugh, like George Soros, believes the market to be correct and they live off the signals provided by the market. This might seem confusing but do note that none of this means that you never go against the market. Indeed, Soros' most famous action was betting against the market with his bearish bet on the British pound (technically, I can see some argue that he was betting against the central bank and not the market.) Instead, my view is that it comes down to whether you value signals from the market or not.

Overall, Hugh Hendry is a true contrarian and this is what attracts me to his thinking. His investment history is way too short—who knows if he was lukily a contrarian last year, when he posted +30% and was one of the few who was bullish on US Treasuries—but I do notice his arguments go against the consensus. Of course, the big risk with being a contrarian is mistakenly being a contrarian for the sake of being a contrarian.

Major Calls: China

One of the major calls he is making is a superbearish outlook for China. He seems far more bearish than almost anyone I have seen. (Of course, this goes against investors like Jim Rogers and Martin Whitman, who have huge stakes tied up in China or its economic performance, either directly or indirectly.)

I share some of Hugh Hendry's views of China but I'm not really sure how bad things really are. In one video clip, he heads over to Ghuangzhou and chronicles the countless skyscrapers that lay unoccupied—the implication being that there is a massive real estate bubble and undisclosed losses are sitting on someone's balance sheet (basically the bearish argument that we are seeing Japan in 1989 or 1990.) It's hard to say how much Hugh's investigative work reflects reality. Some commentators to the YouTube video say that some buildings are marked (in Chinese) as being under test. So some of what Hugh perceives are unoccupied buildings are ones that aren't even completed yet.

I also think the video analysis is a bit weak because it doesn't cover multiple cities (unless I'm mistaken and the video is an amalgamation of several cities.) Guangzhou is the heart of export-oriented China so it makes sense that it would be hit harder than the rest. The real question in my mind is how other major cities are doing. Beijing is a government capital so I would ignore that (govt can prop up such cities) but how about Shanghai or some place like that?

In any case, China's all murky and, given my bearishiness, I'm avoiding it for the time being. This means, if you share a bearish view like me, you should be careful with commodity businesses and capital goods companies. But, staying bearish on China will mean that you may miss out on some of the biggest opportunities of your lifetime. If China is USA in the early 1900's, as Jim Rogers suggests, you may miss out on great potential*. The consensus is that the situation in China is pretty good. In fact, many analysts on the Street seem to suggest that any future, positive, economic performance in the world will come from strong growth in China. So, any bearish view will be contrarian.

Major Calls: Deflation

I don't know if Hugh Hendry will change his view on this but he is a hardcore believer in deflation right now. He has been bullish on US Treasuries all throughout this year. The market, needless to say, has had other ideas, with US Treasuries posting massive losses so far this year. In one of his interviews, he did say that he is very light on Treasuries and expects to consider further purchases later in the year. This is consistent with the view of several others who have suggested that the September/October time frame will decide the fate of many this year.

I lean slightly towards deflation but I believe it will be mild. I'm not really sure if it will be as big as Hugh Hendry has suggested. Yes, there are massive losses lurking around in all sorts of assets (the one under the spotlight right now is commercial real estate in America.) But will it actually take down bond yields all the way down to 2%? I don't know. We'll see.

Not surpringly, like most deflationists Hugh Hendry seems a long bear market in equities. He has suggested in the past that we may be in a bear market for 25 years.

Major Calls: Agriculture

One seemingly inconsistent call by Hugh Hendry is his bullishness on agriculture. He has dedicated agriculture funds and I wonder about the merits of the agricultural call. Another portfolio manager seems to manage the agriculture fund but since he is the CIO, I assume it fits his views.

Hugh Hendry made a major bullish bet on agriculture last year and it totally blew up. He was overloading on fertilizer companies last year near the peak, and, well, it completely collapsed thereafter. It appears that they are more favourable towards value-added agriculture companies like Monsanto and Syngenta. Unless you were very good with commodity analysis, it is probably better to invest in companies like Monsanto than in wheat or rice. But, of course, the established companies like Monsanto, Syngenta, Bunge, and so forth, are rarely ever cheap. I was looking at them near the bottom of the stock market collapse and they didn't seem cheap.

I mentioned a long time ago that it was probably better to invest in soft commodities (agriculture) than metals or energy. But I wasn't bullish back then and still am not. I don't see what Hugh Hendry sees in agriculture.

Overall, Hugh Hendry seems like an interesting guy. I'm curious to see how he does this year. Since he is one of the few deflationists around, I'll be paying more attention to him.


(* Even though USA grew quite well in the early 1900's, it was actually very bad for stock market investors. The US markets were in a very severe bear market that lasted for several decades, until 1920. One of the reasons the bull market in the Roaring 20's was because valuations were extremely low in 1920. Even though the economy grew, and corporte profits rose, for two decades in the early 1900's, stock prices kept falling until 1920. Even if you believe Jim Rogers' thesis, valuations will matter a great deal.)

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2 Response to Thoughts on Hugh Hendry

Daniel M. Ryan
July 25, 2009 at 4:47 PM

Actually, there's a good common-sensical case to be made for switching from Chinese equities to Japanese for the long term. Japan gave the entire world a good run for its money from the 1960s to the 1980s, just as China's done for the last twenty-or-so years; the Japanese economy won't stay flat on its back forever. The trouble is, as of now, the timing's bad.

Also, I heard that shareholders aren't treated all that well by Japanese management. If you want a parallel between another country now and America a hundred years ago...

Sivaram Velauthapillai
July 26, 2009 at 1:04 AM

I started looking at Japan again. I'm still not sold on them because they have poor shareholder relations and companies really don't act in the interest of shareholders. Like I always say, Japan has managed to practice capitalism without rewarding the capitalists. Even some of their big rallies in the stock market (say in the 80's) was really a bubble and not genuine wealth creation.

But change may be afoot. They just can't keep going on like this. We'll see...

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