Every cloud has a silver lining for Edward Dove’s Augustus Asset Managers. Despite being very gloomy on the world economy, he says that whenever there’s a “mess” in the fixed income markets, there are also a lot of opportunities.
Dove, the firm’s president, gave a series of presentations before NAB Custodian Services clients in Australia last month during which he said the firm’s view was only a “quite low” chance of the US having a ‘V’-shaped recession, where the economy quickly turned up after it bottomed.
“There’s a great debate about the shape of the recession,” he said. “The chance of a ‘V’-shaped recession is not on the cards. Will it be a ‘WW’ or ‘U’ or, even worse, an ‘L’-shaped recession?”
He said Augustus, the UK-based fixed interest and hedge fund firm which resulted from a management buyout of the former Julius Baer London-based team, believed that conditions would lead to a hard-landing scenario. “Sentiment has really dropped off substantially. In the US, both the Republicans and Democrats share the same negative view… We think this will migrate to Europe. The UK is already up there with the US but the rest of Europe is behind, but we sense it is only a matter of time before (Europe) catches up. We sense that the banks have a lot more capital raisings to do going forward.”
However, one of the opportunities which this presents, in a “target-rich environment”, is that there is less capital available for hedge funds to take out anomalies in the markets. “This means that the opportunities are staying there longer,” Dove said.
He said that inflation was a major problem which would take time to stamp out. The sub-prime debt crisis had not gone away. The environment for it to completely recover was non-existent. “So, being short sub-prime will remain profitable.” Similarly, there remained opportunities in emerging markets debt, particularly in currencies which were commodity based, and short-duration investment grade credit, where spreads were back to 2002 levels.
The three big decisions for 2008 were the US dollar, credit and financials. “We think the US dollar is getting into ‘buy’ territory on the back of a commodities bubble,” Dove said. “With credit, short-duration high quality credit is a ‘yes’ but otherwise ‘no’. With financials, the question is when to start buying again.”