Is Soros Wrong About China?
Bob Bishop, who once ran investments for billionaire George Soros, is betting his former boss is wrong about China. The world’s second-biggest economy has had its hard landing and is on its way up, according to Bishop.You have to hand it to Bob Bishop, so far this year he's been right on the money on China and commodity stocks. You can view his fund's latest stock holdings here as well as those of Jordi Visser's fund here (as of Q4 2015; Q1 updates coming in mid May).
Rising infrastructure spending, steel production and demand for metal and heavy-duty trucks are signs of improvement for the nation’s industrial and manufacturing sectors, said Bishop, a former chief investment officer at Soros Fund Management who runs $2.2 billion hedge fund Impala Asset Management. Soros said last week that China resembles the U.S. in 2007-08, when credit markets froze and triggered a global recession, and that its banking system is increasingly unstable.
“China already had the crash,” Bishop said in an April 18 interview. “It bottomed at the end of 2015. It’s going to feel like a much better economy in China over the next two years than people seem to think it will be.”
Policy makers in China talked up growth and added stimulus this year to re-energize the economy. In March, the purchasing managers index ticked above 50, signaling expanding factory activity for the first time since June. A recovering China, which is a key importer of steel, copper, iron ore and other metals, bodes well for commodity prices. The price of iron ore rose 44 percent this year as of 1:45 p.m. Tuesday in New York, and copper was up more than 5 percent.
If copper reaches $3.25 a pound, which Bishop expects will occur in 2017, Freeport-McMoRan Inc., the largest publicly traded copper miner, could earn $3 a share, he said. Impala initiated a “modest” investment in the stock in the past month and a half, according to Bishop. It also took a position in miner First Quantum Minerals Ltd.
Commodity Stocks
The firm has boosted its investments in commodity stocks to about 20 percent of the Impala Fund from 4 percent at the start of this year, Bishop said.
"What people often miss on commodity stocks is that their earnings leverage and stock sensitivity to price movements in the underlying commodity is very high, more so than any other sectors in the market," Bishop said.
The Standard & Poor’s Global Natural Resources Net Total Return Index has rebounded almost 40 percent since Jan. 20, its low point this year, after a slide that began in mid-2014 as China’s economic growth slowed.
Bishop, who worked at Soros between 2002 and 2003, started New Canaan, Connecticut-based Impala in 2004. Its main equity fund, which manages about $1.5 billion, gained 7.7 percent in March, bringing returns for the year to 2 percent, according to a person familiar with the matter.
Bishop declined to comment on performance or on Soros’s views.
Warning Sign
China’s March credit-growth figures should be viewed as a warning sign, Soros said at an Asia Society event in New York on April 20. The broadest measure of new credit in the nation was 2.34 trillion yuan ($360 billion) last month, far exceeding the median forecast of 1.4 trillion yuan in a Bloomberg survey.
Soros, a former hedge fund manager who built a $24 billion fortune, in January called a hard landing in China “practically unavoidable.” Soros returned outside capital in 2011 and his firm now manages his own wealth. Hedge fund managers including Crispin Odey at London-based Odey Asset Management and Kyle Bass at Hayman Capital Management in Dallas have been wagering on a slowdown in China. Bass is said to be starting a fund to focus on China-related investments.
Bishop isn’t the only U.S. hedge fund manager who’s bullish on China. In March, Jordi Visser, head of investments at $1.4 billion Weiss Multi-Strategy Advisors, said China’s Shenzhen Composite Index will beat most global peers by the end of this year.
Bishop spent at least a decade focusing on commodities and other cyclical stocks at hedge funds Maverick Capital, Kingdon Capital and Julian Robertson’s Tiger Management.
Impala said in a March 31 investor memo obtained by Bloomberg that energy prices have bottomed, and that improving U.S. demographic and consumer trends, loosening mortgage availability and tight supply are creating an environment in which the homebuilding cycle will accelerate.
Bishop isn't the only one who made money betting big on a global recovery. Carl Icahn has made a killing so far this year on some of his top holdings like Freeport McMoran (FCX), Chesapeake Energy (CHK) and Transocean (RIG). (Icahn also just announced he dumped his Apple shares back in February, another good move).
And if you think that's impressive, check out some of the moves in names like Cliff Natural Resources (CLF), Teck Resources (TCK), Baytex Energy (BTE), Seadrill (SDRL) and Olympic Steel (ZEUS). There are many energy and commodity stocks that have doubled, tripled, and even quintupled since bottoming in mid January and showing no signs whatsoever of slowing down.
In fact, have a look at the S&P Metals and Mining ETF (XME) and you'll get a feel at how big the moves have been (click on image, as of Wednesday's close):
Looking at individual companies, the moves have been even more violent to the upside (click on images, as of Wednesday's close):
What is driving this huge move into commodities and energy names? Traders will tell you they were were extremely oversold in mid January but the violent surge is beyond scary, it's as if all the algos went long and have been steadily adding on every dip. When you see moves this violent, it's definitely being driven by algorithmic/ quant trading and it can persist longer than you think.
Of course, fundamentalists will argue that the world is in much better shape than doomsayers think. And there are some top oil traders like Pierre Andurand who was shorting oil during the last two years now calling for a multiyear rally in crude prices.
Even after Doha, Andurand remains resolute, warning of rising Mideast tensions:
Pierre Andurand, the money manager who made 38 percent betting against oil in 2014, warned that signs of tension at a meeting of the world’s biggest producers this month in Doha point to increasing Middle East unrest that could eventually lead to supply disruptions.Rising oil prices have boosted commodity and emerging market currencies and fueled big moves in Energy (XLE), Oil Services (OIH) and Oil Exploration (XOP) stocks this year (click on images, as of Wednesday's close):
The failure of oil ministers to reach an agreement at meetings in the Qatari capital “clearly revealed deep disagreement within the Kingdom and rising tensions between Saudi Arabia and Iran,” the manager wrote in a monthly letter to clients of his hedge fund, Andurand Capital Management. “As a result, we believe that the current escalation in Middle Eastern sectarian conflicts will likely result in more proxy wars that will eventually create more supply disruptions.”
Andurand’s firm has more than doubled to $1 billion in assets from $430 million about a year ago. His main fund rose 2.2 percent in March, bringing gains to 5.8 percent in the first quarter, according to the letter obtained by Bloomberg.
The fund manager said earlier this year that he thought oil prices had bottomed, ending a decline that began in June 2014. Andurand sees oil prices rallying to $60 to $70 a barrel by year-end, he reiterated in the letter, before they reach $85 in 2017.
Supply disruptions in the Middle East “would come at a time when the market is already rebalancing quickly which would add a large upside potential to our current crude oil price forecast,” Andurand wrote, adding that lower prices may have taken a long-lasting toll on production infrastructure.
“We continue to believe that we are only at the beginning of a structural multiyear rally in oil prices,” he said.
Any trader will tell you "YES! BUY THE BREAKOUT!" but if you're a money manager worried about downside risk, it's very hard to justify buying these breakouts after such an extraordinary non-stop run-up. Sure, the charts tell you to buy but your gut tells you hold on a second, is this rally sustainable, especially after such a hard run-up?
The problem again is these breakout moves are being driven by high frequency quants and algos, pushing prices up based on technical levels, making life miserable for ordinary fund managers trying to figure out whether these big moves are justified and sustainable.
Then there's Soros. Some think he's wrong on China, but others agree with him and think there are rising risks in that country. In fact, Australia's Super is now warning of Chinese bubble risks:
Australia’s largest industry super fund, the $90 billion Australian Super, has delivered a stark warning on the risks in the Chinese economy, warning that the country had a credit bubble which “looks pretty scary.”When you think of China's big pension gamble and the commodity trading frenzy taking over there, you have to question how long this China bubble can go on and whether another Big Bang will clobber risk assets all around the world in the second half of the year.
“The China credit bubble could well be the biggest issue facing China in the next five years,” Australian Super’s chief investment officer, Mark Delaney, told a conference in Sydney today hosted by The Economist magazine.
“When you look at the data in countries that have had credit bubbles, the data is really poor and the policy response is uncertain,” he said.
He said it would be “a big deal for everybody” if China were to have a financial crisis in the next five years.
But he said “no one has a really good handle on it.”
He said Australian Super, which has had an office in Beijing for several years, had been looking at investing directly in China for some time, but it had held off because of the deteriorating economic outlook.
“China has been in a downturn for two years. Profit growth has been terrible and asset prices have been very expensive,” he said.
“It hasn’t been a very good cyclical environment to be involved in.”
But he said there was concern about the credit bubble in China, including growing levels of federal government and local government debt, as well as questions about the bad debt exposure of the country’s banks.
He said Chinese bank shares were only selling at single digit multiples of their returns “not because they don’t make a lot of money, but because people don’t trust their balance sheets.”
“No one really knows how this is going to be sorted out.”
Mr Delaney was speaking after the International Monetary Fund estimated that China may have as much as $US1.3 trillion in loans to borrowers who did not have enough income to meet their repayments.
It estimated that this could mean potential losses of as much as 7 per cent of China’s gross domestic product. In its latest Global Financial Stability Report, the IMF estimated that loans “potentially at risk” could reach as much as 15.5 per cent of total bank commercial lending – some three times the level reported by the Chinese bank regulator.
Mr Delaney said Chinese regulators cut back on credit growth in the past year but had now changed their tune and were now trying to stimulate credit.
His comments followed another bearish comment on the outlook for the Chinese economy by Credit Suisse regional economist, Dong Tao.
He said Australian businesses he had spoken to were “living on a different planet” in their view of the changing Chinese economy.
He said the heyday of Chinese investment in infrastructure, housing and its strong exports had ended.
“The golden age of stimulus of the economy by the Chinese government is over.”
But he said the next Chinese business cycle would be the Chinese consumption boom.
He said demand in China was changing from steel and cement to baby food, organic foods and cosmetics.
“Australia is well positioned to take advantage of Chinese demand but it is changing.”
He said the Chinese government should stop trying to produce economic growth levels of more than 6.5 per cent and be prepared to live with growth levels closer to 4 per cent.
He said adopting growth targets of around 4 per cent would be a lot more credible and “will save a lot of anxiety.”
Then there is Japan. The Bank of Japan stunned everyone on Thursday by keeping its policy steady and not surprisingly, the Nikkei tanked and yen soared. Keep your eyes glued on the yen and emerging market currencies as another Asian crisis could be on the horizon.
All this to say that while some are betting George Soros is wrong on China and the global recovery will continue unabated, I think Mr. Soros will get the last laugh and the Great Crash of 2016 that has thus far alluded us might still be in play.
Below, Bill Gross of Janus Capital Group talks about the Federal Reserve's decision to leave rates unchanged and gives insight into his global investment strategy. Gross also recommended a preferred bank share ETF (PFF) but that was cut out of this clip.
And Antonin Jullier, global head of equity trading strategy at Citi, discusses the market's reaction to the Bank of Japan's vote against further stimulus.
Also, Philipp Hildebrand, vice chairman at BlackRock, talks with Caroline Hyde about European banking profitability, the impact of post-crisis regulation on bank business models, and why he thinks a China derailment is the biggest risk to the global economy. He speaks on "Bloomberg Surveillance."
Fourth, Joshua Crabb, Old Mutual Global Investors head of Asian equities, discusses the outlook for China's economy with Bloomberg's Angie Lau on "First Up."
Lastly, Carl Icahn, Chairman of Icahn Enterprises, discusses his thoughts on the U.S. markets and the economy. He says "there will be a day of reckoning unless we get fiscal stimulus." Listen to his views and what he says about specific commodity stocks he owns.
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