Another bear throws in the towel.
Prem Watsa, the CEO of Fairfax Financial, and largely recognized as Canada’s most famous investor, is dropping his bearish stance on the markets. Watsa announced that he is covering his firm’s equity hedges after suffering a $1.1 billion net loss on its investments in Q4, and $1.2 billion for all of 2016.
The reason is a familiar one: Donald Trump.
“[Full-year] net losses on investments of $1,204 million were primarily as a result of fundamental changes in the U.S. in the fourth quarter that may bolster economic growth and business development in the future. Consequently, we removed all our defensive equity index hedges and reduced the duration of our bond portfolios to approximately one year,” Watsa said in a press release late Thursday.
Net losses on investments of $1,204 million were primarily as a result of fundamental changes in the U.S. in the fourth quarter that may bolster economic growth and business development in the future. Consequently, we removed all our defensive equity index hedges and reduced the duration of our bond portfolios to approximately one year. Our investment actions resulted in our having cash and short term investments in excess of $10 billion at year-end,” said Prem Watsa, Chairman and Cfhief Executive Officer of Fairfax. “In the fourth quarter we announced our agreement to purchase Allied World for $4.9 billion, a transformative acquisition for Fairfax. We continue to be soundly financed, with year-end cash and marketable securities in the holding company approaching $1.4 billion.
“It was a painful quarter and year for Fairfax,” Watsa added during conference call on Friday, adding that “some of you might wonder and might actually think we are doing this at exactly the wrong time.”
Watsa also warned that “we might be in for a period of inflation… based on the latest numbers from the United States.” Actually, the real source of inflation would be China, not the US – an impulse which will soon fade – but he has the right idea.
As BNN reports, Fairfax’s decision to drop its defensive stance marks a swift reversal for Watsa. As recently as Nov. 3, when Fairfax announced its third-quarter earnings, Watsa declared his firm was sticking with its defensive strategy because he was “concerned about the financial markets and the economic outlook in this global deflationary environment.”
But now, suddenly, everything is ok and Fairfax said recent changes in the U.S. have “obviated the need for defensive equity hedges” and as such has closed out all its short positions in the Russell 2000, S&P 500 and TSX 60.
Despite closing his bearish hedges, Watsa joined JPM’s head quant Marko Kolanovic in saying he expects further volatility in the year ahead during the conference call, telling investors 20-30% fluctuations in stocks prices are “very much possible,” warning that quarterly income will fluctuate “wildly” and investment income “will only make sense in the long term”, but highlighting opportunity in volatile markets, so long as investors are extremely selective stock pickers.
He also highlighted the increased prospect for U.S. growth under the new Donald Trump White House, calling for a revival of the “animal spirits” in the U.S. economy.
“The thing about Fairfax and Prem Watsa is that you’ve almost got to regard him in a totally different kind of way,” said Michael Smedley, executive VP and chief investment officer at Morgan Meighen & Associates, in an interview with BNN. “He’s a kind of [Berkshire Hathaway CEO Warren] Buffett. So I don’t know that it matters too much. It sort of feels like it’s a little bit late to be doing that [closing shorts], but then how could he have known?”
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