By Laurence Fletcher
LONDON Mon Nov 18, 2013 9:30am GMT
LONDON Nov 18 (Reuters) – CQS founder Michael Hintze, one of Europe’s most influential hedge fund managers, has warned that France’s struggling economy could present a “major pothole” for investors in 2014.
Hintze, whose firm manages around $12 billion and who was one of the world’s top-performing hedge fund managers last year, painted a picture of a “pretty benign world” for investors and a recovery in Europe’s peripheral economies next year, but picked out France as a concern.
Speaking at the Reuters Global Investment Outlook Summit in London, Hintze pointed to social tensions, government debt, an exodus of workers and the possibility that France may drop out of the euro project.
“The real issue will not be the periphery. The real problem would go back to France,” said Hintze, whose CQS Directional Opportunities fund rose 36 percent last year and is up 12 percent this year.
“Core Europe is in sensible shape, especially Germany, but what does worry me a little bit is what happens in France, because I think that’s one that could be a major pothole in 2014.”
Hintze said he has bought credit default swaps (CDS) – insurance against default – against French corporates, and he picked out banks as the most interesting opportunity. The European Union has prohibited the purchase of CDS on sovereign bonds without owning the underlying bond.
“When we’ve done our stress tests around them (the French banks) they’re fine. (But) they’re interesting enough for me to play the macro theme,” he said.
Hintze isn’t the first hedge fund manager to take a negative view on France. A number have bet, often unsuccessfully, against its government bonds, whose 10-year yields have remained stubbornly low, not rising above 2.7 percent since last summer.
The front cover of the Economist magazine last year depicted France as “The time bomb at the heart of Europe.”
But Hintze’s comments are timely after data on Thursday showed that the French economy shrank 0.1 percent in the third quarter, below expectations of 0.1 percent growth. It has now shrunk in three of the last four quarters. Earlier this month S&P downgraded France a second time.
And a report on Thursday on French competitiveness, commissioned by President Francois Hollande from the Paris-based Organisation for Economic Cooperation and Development, warned it is falling behind southern European countries that have cut labour costs and become leaner and meaner.
IN FAVOUR OF THE EURO?
Hintze also drew a contrast between Germany, which – despite being a major contributor to bailouts of the likes of Greece and Ireland – is largely in favour of the euro zone, and France.
“There’s no question, Marine Le Pen (leader of the far-right National Front party) seems to be gaining popularity,” he said.
“Let’s not forget, France voted against Maastricht. If you contrast that with the Germans … there is a consensus view … Germany is very much for the euro, a consolidated Europe and the European project. We’ll see if France is,” he said.
The French approved the Maastricht treaty in a 1992 referendum with only 51 percent voting in favour, while voters rejected a proposed European constitution in 2005.
Australian Hintze, who recently turned 60 and whose fortune is estimated at 900 million pounds ($1.45 billion) by this year’s Sunday Times Rich List, also said that he is short the Australian dollar – citing the “very, very clear” wish of central bank governor Glenn Stevens for the dollar to weaken – and the yen.
He said there were “massive opportunities” in commodities and is long platinum via so-called risk reversals, which involves buying call options – the right to buy at a pre-set price – and selling puts – the right to sell.
He has also bought copper directly, and has bought shares of some Japanese companies developing robotics. (For other news from Reuters Global Investment Outlook Summit, click here) Follow Reuters Summits on Twitter@Reuters_Summits ($1 = 0.6215 British pounds) (Reporting by Laurence Fletcher; Editing by Peter Graff)