Overheating' Emerging Markets Change Bennett Into Baltic Bear
2007-10-29 20:09 (New York)
By David Clarke
Oct. 30 (Bloomberg) -- John Bennett, who oversees GAM's $1.1
billion European Equity Hedge Fund, says stock prices in
developing economies are rising too quickly and the first markets
to burst will be those of Lithuania, Latvia and Estonia.
Bennett has been short-selling exchange-traded funds that
mimic equities in the Baltic countries in the past two months.
Asian markets may also implode, Bennett said. China's CSI 300
Index has almost tripled this year.
``It's gone daft,'' Bennett, 44, said in a telephone
interview from his office at GAM's headquarters in London.
``Chinese stocks are in a bubble and the Baltic economies are
overheating. They'll end up collapsing under their own weight.''
Bennett's fund has returned 6.8 percent so far this year,
beating the 4.9 percent gain of the Morgan Stanley Capital
International Europe Index. Since the fund's inception in 1999,
the total return has been 142 percent, about five times the 29
percent rise for the MSCI Europe index.
Money managers such as Bennett take a short position by
borrowing shares and selling them, then buying them back at a
lower price to pocket the difference. Bennett's managed assets
have fallen in only one calendar year since GAM, a unit of Swiss
bank Julius Baer Holding AG, started the fund. They gained during
the three-year technology slump that started in 2000 when the
MSCI Europe index fell 52 percent.
Rising emerging-market indexes -- the MSCI Emerging Markets
Index has advanced four times as fast as its global counterpart
this year -- are driven by excessively low interest rates,
Bennett said. The U.S . Federal Reserve's decision to cut its
benchmark interest rate on Sept. 18 set the trend.
``The Fed keeps going back to easy money as a solution,''
Bennett said. ``It's indicative of what's going on around the
world. The Fed sets the tone and the last thing these countries
need is a looser monetary policy.''
As a hedge fund manager, Bennett also can bet against
indexes or by using derivatives, which are financial instruments
whose values are based on other securities. Managers of mutual
funds generally are not allowed by regulators to sell short.
Bennett expects the governments of Lithuania, Latvia and
Estonia may be forced to devalue their currencies because the
expanding economies are fueling inflation.
Asking rates for 3-month loans on the Rigibor, Latvia's
interbank lending rate, have grown to 12.8 percent this year, the
highest level since 1998.
Many consumers borrow in euros, because the European Central
Bank's base rate stands at 4 percent, according to the Financial
and Capital Markets Commission in Riga.
Consumer prices in Latvia are rising at an annual 11.4
percent. They're advancing 7.1 percent in Lithuania and 7.2
percent in Estonia, compared with a 2.1 percent rate for the 13
nations sharing the euro. Inflation will most affect banks and
building companies, Bennett said.
In addition to shorting shares of funds that track east
European indexes, he's doing the same with some Swedish banks and
construction companies that do business in the Baltic region. He
hasn't started betting against China yet.
Emerging markets overall still have the potential to rise,
and record gains in China overshadow the potential for markets
such as Brazil and Korea, according to Claude Tiramani, who helps
oversee about $14 billion in emerging markets stocks at BNP
Paribas Investment Partners in Paris.
While China's CSI 300 is trading at about 43 times future
earnings, the Brazilian Bovespa Index trades at 14 times future
earnings and Korea's Kospi Index at 16 times earnings.
The CSI 300, which tracks yuan-denominated A shares, reached
a record 5,877 on Oct. 16. The economy and financial markets
aren't at risk because export income will continue to maintain
asset prices in the country, he said.
``It can be misleading if you look just at China because
there is a lot of value left in some markets,'' Tiramani said.
China is ``not going to collapse.''
Bennett, who went straight to work for Clydesdale Bank after
leaving high school, has been at GAM since 1992. Born in Glasgow,
he still supports the city's Rangers Football club and plays and
referees soccer in his spare time.
So far this year, Bennett's pessimism has worked in his
favor. At the start of 2007 he took a short position against Bank
of Ireland Plc, Ireland's biggest lender. Irish house prices had
their first annual decline in at least a decade in July because
of higher borrowing costs. Mortgage lending fell 14 percent in
the second quarter from a year earlier. The Dublin-based bank has
dropped 29 percent this year.
He sold out of Commerzbank AG four months ago. Germany's
second-largest bank said on Sept. 20 that second-half earnings
would be weaker than in the first six months of the year,
backtracking on a previous forecast that it would beat its 2007
targets. The company, which has 1.2 billion euros ($1.7 billion)
of investments linked to so-called subprime mortgages, fell 19
percent in the third quarter.
Bennett shorted British Land Co. Plc, the U.K.'s second-
largest real estate investment trust, which said on Aug. 16 that
fiscal first-quarter profit fell 34 percent.
U.K. commercial real estate in September had its worst
return in more than 17 years as the value of shops and offices
fell, according to research firm Investment Property Databank
Ltd. British Land has dropped by 40 percent this year.
The fallout from subprime investment declines in the U.S.
has mostly been played out, Bennett said. He says he's undone
most of his short bets on real estate and banks.
``It's a red herring,'' Bennett said. ``As we are all gazing
at U.S. subprime, the problem is coming from behind our back in
--With reporting by Aaron Eglitis in Riga. Editor: Swardson
To contact the reporter for this story:
David Clarke in Edinburgh at (44) (131) 200-6281 or
To contact the editor responsible for this story:
Frank Connelly at (33)(1) 5365-5063 or
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-0- Oct/30/2007 00:09 GMT