Bridgewater shorting Europe: a pinch of salt or a well-anchored disbelief?
It has been a hot topic in the media lately. Bridgewater, an American investment management fund, has shorted European stocks for $22 billions last February. The discomfort arousing from that bet is that it is discordant with the happy talks regarding EU equities outlook. Despite the recent turmoil on the US equity market, 2017’s solid economic backdrop and increasing profitability should drive equity returns to new highs in 2018 even as we see earnings momentum weakening.
The following article will allow us to do an overview of the European equity markets, its potential potholes, and to demonstrate that the bet of Bridgewater is nothing but rational over the very long-run, and certainly not worth all the worries.
The beast and the bet
First of all, what is Bridgewater? Or rather, who is Bridgewater?
Bridgewater Associates is America’s largest hedge fund with $160b AUM. Its founder, Ray Dahlio, is one of these figureheads of the investment world. Having created Bridgewater Associates in 1975 in his New York apartment, Dahlio is now leading the most profitable individual hedge fund of history – Pure Alpha, with $63billion in AUM and $45b in returns between its inception and the end of 2015 –, also sharing his principles of success in a book or taking part to Davos summit talks alongside Christine Lagarde. So really, when Ray Dahlio shorts for $22b, it is worth to be noticed.
In just one week, Bridgewater more than quadrupled how much it’s betting against European Union companies. The biggest short positions in value are concerning the DAX – including Siemens, Deutsche Telekom, Deutsche Bank, or Daimler –, the MIB (Italy) and the IBEX (Spain) where the fund targeted the utilities-, financial-, or even fashion industry. Other countries at stake are France (Total, BNP, Societe Generale), or Netherlands (ING Groep). Since the Feb. 8 regulatory filings, Total has fallen about 1 percent as markets slumped. Airbus, BNP Paribas, ING Groep and Banco Santander have sunk roughly 2 percent.
The bet here is that share prices are going to continuously drop, resulting in a downward trend in the long-run. What could be the underlying assumptions? An interest rate capacity constraint? The uncertainty of Italian elections? The inflation outlook? The problem that arouses to my mind is that the bet is going to succeed only if there’s a slowdown in the Eurozone economy or if euro stocks are a less attractive opportunity compared to US equities. However, none of these hypothesis is likely to happen in the short-run.
DAHLIO vs. the rest of the investment world
Eurozone equity market is doing fine and almost everyone agrees on it. 2017 has been a remarkably profitable environment for equities with a global recovery, interest rates remaining well-anchored and many of the uncertainties related to political events gradually fading away.
Despite the slower pace of growth anticipated, the global expansion is to be continued in 2018. What is at stake in Dahlio’s short bet is the extent to which the Eurozone economy will be able to navigate in the significant potholes of 2018.
Quick scan of Eurozone risk factors and why I think they should be tempered: