Close to a year ago, Crispin Odey, the high-profile British hedge fund manager who profited by correctly predicting the 2008 financial crisis, grabbed headlines around the world with his bleak warning that the global economy was poised for a slowdown that would "devastate" share markets.
"We used all our monetary firepower to avoid the first downturn in 2007-09, so we are really at a dangerous point", Odey write in an investor letter in January, pointing to slowing growth in China, falling commodity prices and problems in emerging markets. "The shorting opportunity looks as great as it was in 07-09."
His gloomy prognosis appeared prescient amid the huge sell-off that wiped more than 10 per cent off the value of global equities in the first six weeks of the year, and pushed the oil price to a low of $US26 a barrel.
But that was before major central banks in Europe and Japan went full-tilt expansionary, Beijing introduced new stimulus measures to revive flagging growth, and the US central bank abandoned plans to hike interest rates. Reassured by these efforts to spur growth, global equity markets staged a major rally that more than wiped out previous losses.
Odey, however, remained stuck to his bearish guns, and positioned his investment portfolio in order to benefit from what he believed was the inevitable collapse of the central bank-induced bubble in financial markets. So far, the results have been painful. Odey's flagship European hedge fund posted a loss of 48 per cent in the first 11 months of the year,
But Odey is far from the only high profile investor who struggled to match the market in 2016. John Burbank, the San Francisco-based hedge fund manager who also profited by betting against subprime housing before the financial crisis, was also punished for his bearish beliefs.
Looming problems
Back in May this year, Burbank warned that the markets were ignoring looming problems in both China and the United States that would show up within the next year.
"China will enter their liquidity crisis with likely the largest amount of non-performing debt in the world; the US will enter its recession with the smallest rate reduction potential in history. For both it will be a normal ending after decades of extending their booms."
Burbank's Passport Capital saw its global strategy fund lose 15 per cent in the year through November.
Other high profile investors were rescued from negative returns by the surge in global equity markets – and the sell-off in bond markets – following Donald Trump's surprise election victory last month.
Ray Dalio, who founded the world's largest hedge fund, the $US150 billion Bridgewater Associates, appeared far from optimistic back in March when he warned investors to prepare for low returns and volatile financial markets,
But he was much more positive about the outlook for US domestically-focused stocks in the wake of Trump's victory, pointing out that they stood to benefit from stronger fiscal stimulus, corporate tax changes and less regulation.
Warning bond prices at peak
"We believe that we will have a profound president-led ideological shift that is of a magnitude, and in more ways than one, analogous to Ronald Reagan's shift to the right," Dalio wrote on his LinkedIn page in mid-November. "Donald Trump is moving forcefully to policies that put the stimulation of traditional domestic manufacturing above all else, that are more pro-business, that are much more protectionist." He also issued a warning about bond prices, saying it was likely they had reached a three-decade peak.
Bridgewater's Pure Alpha II fund, which was down 10 per cent at the end of September, notched up strong gains in the following two months, and was close to break-even at the end of November.
Of course, despite the mauling they received in 2016, it is still premature to declare that the bears were wrong in their pessimism about the global economic outlook. Those bears who maintained the faith will be hoping that their gloomy predictions were premature, rather than incorrect, and that their warnings will be fully vindicated in 2017.
