November 16, 2015 / 3:11 PM / 2 years ago

Man's president says 2016 macro playbook similar to this year

LONDON (Reuters) - While 2016 may end up looking a lot like this year, there remain an array of opportunities for stock and bond pickers, particularly in China and the emerging markets, Man Group (EMG.L) President Luke Ellis told Reuters on Monday.

Speaking at the Reuters Global Investment Outlook Summit in London, Ellis said China, Europe and Japan all remained committed to money printing and fearful of deflation, which suggested little chance of a major unexpected policy tightening.

“All three of those look like they are going to keep the taps going as hard as they can, which allows for a certain tightening in U.S fiscal policy without making much difference to the big picture,” Ellis said.

“It’s very likely she’ll [U.S. Fed Chair Janet Yellen] raise 25 bps (in December) and it’s very likely it doesn’t matter in the slightest,” added Ellis, whose firm managed $76.8 billion at end-September to make it the world’s largest listed hedge fund.

While the market’s consensus ‘buy’ on the dollar was logical, however, investors needed to trade it carefully, he said.

Against that backdrop, and after a year in which many emerging markets saw sharp stock and bond market falls as concerns around Chinese growth spiked, Ellis said he saw value in some of the worst-hit markets.

After a 45 percent summer slide in China's main onshore stock market .CSI300, and knock-on weakness in other emerging markets, Ellis said it was "very fertile territory" for investors who analyze each company on its merits, as there was little correlation between Chinese growth and stock valuations.

“As one of the people at work said to me the other day, the thing about being a contrarian is you need to be wrong first ... There’ve been a lot of outflows out of emerging markets because of the sense people had that it was a one-way bet.”

The falls had also been fueled by central banks and sovereign wealth funds selling to realize investments for reasons other than their view of emerging markets, he added.

SWAPS

Given the easy-money profile of most central banks, it was unlikely growing market fears of a new global recession would come to pass, Ellis said.

While some said those concerns were to blame for a negative dollar swaps rate, Ellis put the move down to the impact of regulations aimed at making banks hold more capital and take less risk, to prevent a rerun of the financial crisis.

“One of the unintended consequences of that regulation has meant that to create an interest rate position, or to hedge an interest rate position, banks would rather take credit risk than to have assets on balance sheet.”

In turn, the move had caught out some hedge funds which bet on macroeconomic moves using rates, currencies, derivatives and other instruments.

“What it leads to is more volatility about relationships (between asset prices), because arbitrage constraints naturally become much wider. People that ... enter a trade at the same relationships as they used to be, I think are making a mistake.”

With a spread of political and macroeconomic events slated for 2016, opportunities to profit would remain, Ellis said, including in Britain, which is gearing up to vote on a possible exit from the European Union.

While Man has no house view on a “Brexit”, which Ellis saw as being a close call, buying the pound at around 1.45 or gilts -- should a material yield premium develop -- could prove to be good entry points if Britons vote to remain, he said.

But if voters opted to leave, that gilt premium would be needed.

“If we vote for a Brexit then you’ll need a yield premium, because you get back to the question of ‘who’s paying the bills between the rest of the UK and Scotland?', because Scotland will go the other way. That ends up in a break-up.”

(For other news from Reuters Global Investment Outlook Summit, click here)

Follow Reuters Summits on Twitter @Reuters_Summits

Additional reporting by Carolyn Cohn; Editing by Catherine Evans

Our Standards:The Thomson Reuters Trust Principles.
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