Permal ups long exposure in Japan, China, wary of EM

UK fund of hedge funds firm Permal has increased long exposure to Japan and China while keeping a cautious stance on emerging market equities as market sentiment adjusts to changing macro conditions.

Despite Japan’s market correction in May, the firm has an optimistic view on the country, taking a longer position on the market in mid-June, according to Permal chief executive Isaac Souede.

Abenomics is, in a broader sense, a plan for long-term structural reform and “not light work, but everything they’ve done to date has been right", Souede tells AsianInvestor during a recent visit to Hong Kong.

Permal Japan Holdings is among the firm’s best-performing FoHFs, having gained 13.9% in the first six months of the year.

The firm has also upped its China exposure, says Souede, noting that while it “was not so good in the last two weeks of June”, when uncertainty fuelled market volatility, it has been “very good” this month.  

“Japan has drawn some interest away from China, and perhaps unjustly. It’s at the point where there are negative articles constantly about China,” says Souede, who does not believe the country is headed for a hard landing.

“It’s taken away some of the ardour, [but] it tells me that from the long side, it’s not a very crowded trade.”  The sentiment is also held by mainland-focused alternatives fund manager CSV Capital, which views Chinese equities as undervalued. 

Permal opened its Shanghai office early this year, which largely serves as a research office. Over time, members of Permal’s analyst teams from US and London will be relocated to the operation, including individuals from the Jubilee FoHF team, which had originally been with Fauchier Partners. 

Permal’s merger with Fauchier Partners – the UK-based FoHF with a large institutional base – was finalised in March, resulting in the combined entity overseeing about $24 billion.

In the coming years, Souede foresees “an explosion of [China] managers, not only in equity long/short but also in fixed income, and ultimately in municipal bonds as the Chinese market develops”.

Permal, through its parent Legg Mason, has access to an additional $100 million in newly-awarded  qualified foreign institutional investor quota. Prior to the top-up allotment, which was granted last month, Legg Mason had an existing $200 million quota for the purchase and sale of China A shares.

"We’re very pleased with that because I’ve got many ideas of what I want  to do inside China," says Souede.

Meanwhile, Permal is "very wary about emerging market equities", says Souede.

With the exception of China, emerging markets have been suffering from “stagflation” – a combination of inflation and economic stagnation, he notes.  “[Our reaction] is to be very protected. We’re beginning to favour, in our allocation, emerging market debt than emerging market equities.”

It echoes sentiments from institutions globally, which have reversed their bullish sentiment on emerging markets strategies in the last six months, according to a recent Credit Suisse investor survey. 

Permal last year reduced its exposure to certain fixed-income strategies.

“Non-traditional fixed income strategies, such as fixed income trading, fixed income hedge and event-driven have done much better than traditional fixed income,” says Souede, adding that it's going to be difficult to be a traditional fixed income investor for some time, be it high yield, corporate debt issuance or treasuries.

“You can see the beginning of an exodus from fixed income that is occurring in America. There was $60 billion of withdrawals from bond mutual funds in June, which is by far the largest number ever seen. The rotation of that to equities has not happened. It went to cash.”

Permal favours activist managers given the prevailing global macro conditions and an “exceedingly high” level of M&A activity, says Souede.

“The American economy is growing while the Chinese economy is slowing and impacting other emerging markets, creating stagflation,” he notes.

At the same time, Europe’s problems appear to be bottoming out, while Japan has embarked on an unprecedented economic stimulus plan.  “This is not a world that’s acting in a synchronised way, by any means,” adds Souede.