Remember Vijai Mohan? The Globe and Mail introduced him to readers last April as the man who's selling Canada short, a San Francisco hedge fund manager who made a heavy bet against the Canadian economy, predicting the loonie's value would tumble and that Canadian bank shares would fall.
Fast forward nine months to the present: The loonie is definitely swooning, but so far, Canadian bank stocks have been holding up reasonably well. With the onset of a selloff in emerging markets – possibly a harbinger of worse to come – we contacted Mr. Mohan to find out how his positions and views have evolved.
In short, they haven't. Mr. Mohan won't disclose the fund holdings of his Hyphen Partners LP or whether he is as heavily weighted against Canada as he was nine months ago, although he does say he has outperformed the HFR hedge fund long-short index last year and in the fourth quarter. However, he continues to hold positions that would benefit if the Canadian situation deteriorates, in the form of futures contracts and short positions in common equity of Canadian financials. "The general theme of being bearishly positioned on financial assets [from Canada] remains," he said this week. "It was significant then [last April]; it's still significant now."
Mr. Mohan's fund is not going to move the market on its own. He won't disclose his assets under management, but is believed to manage an amount in the low- to mid-eight figures, which makes him a small player in the U.S. hedge fund world. However, his pessimistic take on Canada's economic prospects is shared by some far more prominent names in the investment world, including hedge fund manager Steve Eisman of Emrys Partners – featured in Michael Lewis's The Big Short – and Canadian hedge fund manager Jean-Francoise Tardif.
Mr. Mohan's views are based on two factors: an anticipated emerging-markets bust, which would negatively affect the Canadian economy, and the widening gap between Canadian and U.S. output.
The hedge fund manager has been calling for a bust in emerging markets for some time; whether recent events are a hiccup or the start of something more serious like the events of 1997-98 in Asia and Russia, is not yet known.
In Mr. Mohan's view, a bust is not a matter of if, but when, and when it happens, it will have a big downward effect on oil demand and prices. That would hurt Canada's economy, and in turn cause a big downdraft in the country's overvalued housing prices, ultimately hitting Canadian banks hard. "I'm unaware of any other situation in history" he says, where a combination of deteriorating markets, highly-levered consumers and historically high housing prices "didn't ultimately affect the banks … Either the Canadian economy will prove to be some kind of miracle, or it's going to be like every other bust situation we've seen unfold in the past."
One thing he's watching closely is bank profits from fixed income, commodities and currencies. The Financial Times recently reported profits from the so-called "FICC" business at the world's top 20 banks decreased to €110-billion ($168-billion) in 2013 from €160-billion in 2009. Mr. Mohan sees this as a sign that increasingly cautious and regulated banks are not as willing to put up their own capital to trade bonds as they have been in the past, and therefore wouldn't step in to buy up emerging markets debt as they have in past credit downcycles should investors start to flee.
"You could see a mismatch in demand and supply," he said. "This emerging markets cycle could play out worse than in 1997-98 because of an unwillingness of counterparties to support the market."
The loonie's recent slide, he says, is the result of "a recognition of traders that some of these risk factors are indeed in place." He points to Canada's weak jobs report from December and an uptick in U.S. economic statistics as a sign that the neighbouring economies are on a diverging path. If that gap sustains and grows over the next few years, "I think you could see a 30-per-cent move in the currency from here. A 70-cent Canadian dollar is possible, if not worse" in five years, he said.
Sean Silcoff