China’s ‘Hard Landing’ Spells Doom for Europe, Economists Warn

An economic consultancy has set out a dire forecast for China’s growth—and Europe could bear the brunt of the fallout.

China is experiencing an economic “hard landing” far greater than that shown by its official data, according to economic analysts Fathom Consulting—and it is set to have a major negative impact on the rest of the world.

Speaking at a briefing this morning, Fathom Director Danny Gabay warned that China could be forced to remove the renminbi’s peg to the US dollar to relieve deflationary pressures on its financial system. This would effectively “export deflation” to other parts of the world—and the Eurozone is ill-equipped to deal with this, Gabay said.

“Deflation is good for some, but others will lose significantly.” —Danny Gabay, Fathom ConsultingOfficial data from China’s National Bureau of Statistics estimated the country’s economy expanded by 7.4% in 2014. However, using data from rail freight, banking, and electricity usage, Fathom’s experts estimate this could be as much as double the real figure.

Gabay likened the effect of falling property prices on China’s banks to the property market collapse that preceded the market crash, recessions, and banking crises experienced in developed economies since 2008. In order to offset this effect, allowing the renminbi to fall in value in dollar terms was “very much what China needs to do, in our opinion,” Gabay said, which would push down the price of goods exported by China.

Want the latest institutional investment industry
news and insights? Sign up for CIO newsletters.

“Deflation is good for some, but others will lose significantly,” he said. Countries with low demand, low inflation, high levels of debt, and without the power to devalue their currencies will suffer most—criteria that all apply to the Eurozone.

“Countries with debt-to-GDP ratios above 80% can’t afford deflation,” Gabay stated. Fathom’s models indicated that, based on current data, Germany’s debt-to-GDP could soar above 100% if China successfully exports deflation, while Italy’s ailing economy would see its debt exceed 200% of GDP.

Delegates at the briefing in London agreed that China was likely to allow its currency to depreciate slowly in the coming two or three years.

Last year ratings agency Fitch warned that asset managers based in Europe could be hit hard by deflation if they are not sufficiently diversified outside of the currency bloc.

Falling asset prices would have a negative effect on fixed income markets, the agency said, by causing interest rates, debt burdens, and default rates to rise. European equity markets would also suffer in performance in a deflationary scenario, Fitch said, hurting asset manager profitability through reduced assets under management and fee income.

Related Content:European Deflation to Hit Asset Managers’ Bottom Line & The Great Deflation Delusion

The Best Performing Hedge Fund of 2014 Was…

One hedge fund returned 225.21% last year—but which one was it?

A fund focussing on Indian equities made the best returns in 2014, according to data from Preqin.

Arcstone Capital’s Cayman-domiciled Passage to India Opportunity Fund made 225.21% over the 12 months, beating second-placed venBIO’s Select Fund by more than 150 percentage points.

According to Arcstone’s website, the company “invests in a diversified portfolio of Indian companies, with a long-term investment horizon of approximately three years. Our portfolio is value-sensitive, concentrated in 10-20 companies, and has low turnover”.

Preqin analysed returns from more than 5,200 hedge funds worldwide.

Want the latest institutional investment industry
news and insights? Sign up for CIO newsletters.

Preqin HedgeThe top five performing funds were all equity-based with sixth place in the ranking being taken by a commodities fund—RCMA Asset Management’s Merchant Commodity Fund—which returned 59.29%.

Indeed, three-quarters of the 20 top performing hedge funds in 2014 employed an equity strategy, Preqin said. The median return throughout 2014 for the top 10 performing equity strategies funds was 59.03%, higher than any other strategy.

However, the difference between the top and bottom performing funds in this sector was 186.21 percentage points. This dispersion was the greatest of any strategy, but was mainly due to the outperformance of Arcstone’s Passage to India Fund.

Equity strategies have been the horse to back over the past three years, Preqin said. The median return over that period was 51.73%. However, the S&P 500 made 74.5% in the same three-year period, with the FTSE All Share making 51.4% on a total return basis.

The second best hedge fund performer over the three years to the end of 2014 was event-driven strategies with a 27.48% return, said Preqin. In 2014, however, this sector made a median return of 17.75%, putting it in fifth place of a group of six strategies.

Credit hedge funds came bottom on both the one and three-year results with median returns of 15.48% and 16.23% respectively. The best performing credit hedge fund—the STS Partners Fund run by Deer Park Road—made 26.09% over 2014. 

It was also the strategy with the smallest dispersion of returns. The difference between the top and bottom credit hedge funds was 12.07 percentage points. 

One major outlier in Preqin’s data was the return made in 2014 by a multi-strategy hedge fund. The Atrevida Multi-Strategy Charter Fund – Class D – Series 2 (RMBS Opportunity), managed by Atrevida Partners, made 3806.30%. The fund’s closest competitor was the FondSelect Global managed by Aktie Ansvar, which made 20.25% in 2014. Multi-strategy funds were not classified in the overall data sets by Preqin. 

North American managers had the most success last year, Preqin said, with 42% of the best performing funds being based in the US. New York City housed the best of the best, with 13% of the top funds calling the Big Apple home.

European managers were the next most successful with 32% of the top funds based on that continent. Asia-Pacific managers were responsible for 17% of the best funds last year.

In terms of choosing a vintage, funds launched in 2009 had the best returns last year, the data showed, followed by those created in the five years from 2000.

Hedge incepOver a two-year period to the end of 2014, London-based Stratton Street Capital had the best returns. Its Japan Synthetic Warrant Fund – JPY Class made 133.90%, doubling the returns of the next best fund, the venBio Select Fund LLC, which was also second place over one year.

All return figures are net of fees. 


Related content: Guggenheim Sells Hedge Fund Unit & How Skillful Is Your Hedge Fund Manager?

«