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Wednesday, September 21, 2011

Bill Browder of Hermitage Capital interview with L'Echo

Bill Browder of Hermitage Capital was recently interviewed with L'Echo and gave his opinion on the markets and how he is positioning himself. For those unfamiliar with Bill Browder he is probably one of the best emerging market ivnestors of all time. See my prior post (highly reccomended) on his interview with Stanford, here.

The interview is translated and pasted below, however for my francophiles out there here is a link to the original french interview.

Bill Browder "The markets should be much lower than they are today"

The founder of hedge fund Hermitage Capital Management told us: he is afraid of the markets. And completely changed his management style. Here's why.

William Browder, founder of hedge fund Hermitage Capital Management, a manager is not like the others. We met in Paris just before the start of a hearing of the Council of Europe on the matter Magnitsky. Sergei Magnistky was the lawyer's business Browder, before it is ejected from Russia and declared persona non grata in 2005. Magnitsky himself has been imprisoned and died shortly after. With the exception of Russia, Browder has not yet lost his faith in emerging markets, where its money is invested. But we said it had completely changed his management style since the beginning of this year. A meeting with the politicians present at the summit in Davos was enough to become pessimistic about the markets. He explained why.

Market volatility shows how much investors are afraid right now. How do you explain this?

Investors have good reason to be afraid right now. There is an unraveling of the crisis of sovereign debt in Europe, a deficit out of control in the United States and a revolution in six Middle Eastern countries close to major oil producers. And most economic indicators suggest that the global economy is close to falling into recession. All these reasons, taken individually, are sufficient to make the markets down. Together, they should send the market much lower than they are now.

What prevents the stock market to collapse?

Market support based solely on government intervention. Central banks print money. The official name of this operation is the quantitative easing. The other market support based on low interest rates. They should be 3-5% higher than they are now, due to manipulation by central banks. This gives a terrifying combination for any holder of an asset, because the price of it is contingent of forces unrelated to the markets.

The search for the intrinsic value of an action is therefore no longer possible?

I prefer to speak of market value than intrinsic value. If interest rates are allowed to rise to the level of rates without government intervention, this would change everything. For example, real interest rates in the United States should be 5% instead of 0.25%. If they were to rise by 0-5%, the 30-year Treasuries to fall by 50%. The Apple stock is expected to lose 38%. Like other similar assets. Asset prices are completely all artificial.

The price of gold do they meet the same logic?

Gold occurs in a particular situation. Any asset class goes up 100% in a short period of time has a significant downside risk. On the other hand, gold prices are high because they compensate for the weakness of all major currencies. Gold has become an alternative currency to other currencies to depreciate. And if Greece out of the euro area or if there is an additional problem with the debt of other Western countries, the price of gold may go higher. The strength of gold is based on the lack of confidence in the inability of governments to protect the purchasing power of their currency. I have always gold. I bought 1,000 dollars an ounce. And I do not sell it soon.

But gold prices flirt with the 2,000 dollars an ounce. Is there still time to buy?

I would not advise anyone to buy whatever the price. I had myself reluctant to purchase gold at 1000 dollars.

Gold has no use yet, unlike all other commodities.

Well, that's an advantage for the gold. The raw materials are used for industry. In a recession, they undergo a correction. Just look at oil prices recently to be convinced. Gold as currency retains its value, unlike other commodities.

In August, hedge funds have experienced particularly difficult one months.
Was this your case too?

My money is fully "market neutral", meaning that each position corresponds to a higher position down. When the markets suffered a sharp correction in August, I had no directional exposure to them. Result, when markets lost 20%, we limited our losses to 3%. Since the beginning of the year, our performance is 2%, against 13% for emerging markets.

Your client did fear and threat does to withdraw money?

They emes calm, but I was afraid and I have reduced the net exposure of my portfolio from 100 to 0%. We were able to avoid the chaos of the markets. At the World Economic Forum in Davos in January, I spoke to different people and I realized that most of the politicians present there was optimism, but they had just seen all the major problems of the world economy. Markets reflect the same feeling that politicians who govern us. They ignore the problems. When I returned from Davos, I asked my team to reduce the net exposure of our portfolio. This has avoided being in the red since the beginning of the year.

In China, a wave of scandals involving listed companies. Some hedge funds have left their feathers. Your funds specializing in emerging markets, he was touched by these scandals?

I am invested in China on the rise and fall (he plays down BYD, the company car which is a shareholder Warren Buffett, ed.) The scandals we were not affected. But this shows that emerging markets should be treated more cheaply than Western stock exchanges.

The current situation is comparable with 2008?

You can not compare the current situation with that in the aftermath of the collapse of Lehman Brothers. For two reasons. The first is based on the completely unexpected nature of the bankruptcy of the bank in 2008. On the other hand, the scenario is worse this time because they are more companies that are likely to fail, but the States. The crisis of 2008 has been delayed by the intervention of governments that have injected massive amounts of money. We are in the second stage of the financial crisis that began in 2008.

The output of this crisis will she slow and painful, like the Japanese situation?

Each country has its own characteristics. But the problems of economies and markets in the U.S. and Europe make it difficult for any investment strategy to increase market long term. We must remember that over 20 years, the Nikkei lost 80% of its value.

But institutional investors like pension funds, insurance, and even mutual funds have the possibility to play down the markets. Their mandate requires them to be on the rise on them long term. How will they manage these market conditions?

We will witness the failures of pension funds and insurance companies. Companies with long-term commitments will have problems. Pensioners will be affected by these inevitable problems. The next decade will be difficult for everyone because of the accumulation of debt by governments and by individuals.

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