Cazenove's Russell may raise cyclicals short bet
LONDON (Reuters) - Cyclical stocks such as miners which soared in last year's rally now look expensive, said Cazenove fund manager Tim Russell, who plans to increase his bet that their share prices will fall.
Russell, who runs Cazenove Capital Management's UK Equity Absolute Return hedge fund, instead prefers defensives such as healthcare and utilities, which lagged in 2009 but which he thinks can provide steadier earnings as the UK battles to return to growth after a deep recession.
"I think defensives are broadly cheap while cyclicals are likely to be prone to disappointment," said Russell, who owns defensive stocks and is short cyclicals, at a conference in London on Tuesday.
"In 2009 the level of cyclical outperformance was greater than 2003 ... Is it likely that we'll get the same period of above trend growth that we saw from 2004 to 2008, which was largely led by huge leverage in the system? I personally think the answer is not."
Most economists think the Bank of England will hold off from adding to its 200 billion pounds quantitative easing programme next month and Russell believes this, along with the China central bank's move to rein in lending, could be signs to increase his bets.
"With the withdrawal of policy there are likely to be significant effects. One of these is likely to be a reversal of trends we've seen," he told Reuters on the sidelines of the conference.
"There will come a point this year when we know we have to be braver and start increasing cyclical shorts again. The momentum isn't yet there for doing it, but some of the signs are there. Chinese tightening is one of the first signs," he told the conference.
Russell's hedge fund rose 9.4 percent during 2008's market turmoil, but gained just 0.4 percent in last year's huge rally after taking a too-defensive stance, although he is still ahead of the average long-short fund's fall of around 4 percent over those two years.
He said stocks such as miner Kazakhmys (KAZ.L), which he said had underperformed earnings forecasts in recent years, could be vulnerable if investors move back into defensives.
"This should be a very low p/e (price-to-earnings ratio) sector," he said, adding he believes it should be on 6 times earnings rather than around 10 times due to the unreliability of its earnings.
"Essentially the profitability of Kazakhmys is largely driven by one key variable -- spot prices of commodities. They are highly unpredictable."
He did not name individual stocks he is short, although his fund has a 12.5 percent net short position in basic materials.
"I do think that as this year goes on investors will start looking more ... at defensive growth ... They're not expecting an awful lot in 2010.
"The chances of GlaxoSmithKline (GSK.L) (also on around 10 times earnings) pleasing rather than disappointing are significantly more than Kazakhmys."
(Editing by David Holmes)
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