The global post-crisis recovery is being buoyed by a government-funded bubble, carrying with it the risk of a sovereign credit problem – although Asia is the best-positioned region to weather a shakeout, hedge fund managers said at a UBS roundtable in Hong Kong last week.
“There’s always a bubble in something, at any time,” notes William Kay, founder of The Pacific Group which manages the Greater Asian Hedge Fund. “The next crisis is going to be a sovereign crisis and that’s going to be the lynchpin of the markets.”
The underlying reason, he believes, is that the force which has lifted global markets over the past few years is merely a government-inflated bubble.
“This is the phoniest recovery, globally, I’ve ever seen in my life,” says Kay. “So much has been thrown at the global economy by governments and central banks that the numbers we’re looking at, that are supposed to be celebrated, are incredibly suspicious.”
Governments have been guaranteeing or assuming private sector debt and have received “unbelievably meagre” returns as a result, opines Kay, who did not name specific countries or regions. “The engine that is being used to fire this recovery is not sustainable. Government after government is either broke or going broke.”
The good news, according to Matthew Moskey, portfolio manager for the event-driven Omni Asia Fund, is that “Asia is the most able to weather the next turn”. He notes that the US, and to some extent Europe, have been propping up the global economy. “So who will be able to weather it best coming out of the other end? It’s going to be the Asian region.”
The panel was candid on the hedge fund industry’s position of taking advantage of bursting bubbles. Alex Au, managing director of Richland Capital Management, takes the view that “bubbles exist every day… it all depends on the scale”. Hedge fund managers, he acknowledged, “love that”, adding: “If there are no bubbles, these guys are out of jobs.”
Au also notes that “risk and opportunity always come together”. As an example, he outlined a recent position taken by Richland in a Japanese construction company during highly volatile market conditions in the trading days that followed last month’s earthquake and tsunami that struck Japan. In the two weeks that followed, “the stock had outperformed by more than 10%”.
Notes Au: “Where there is volatility, you always find more opportunity.”