Hedge fund manager Rohit Sehgal is upbeat on global stock markets, saying he doesn't believe that a slowing U.S. economy will choke off growth around the world.
"We are quite bullish despite all the gloom and doom," said the chief investment strategist at Toronto-based Dynamic Mutual Funds Ltd. "World economic growth will remain robust despite what is happening in the United States."
The collapse of the U.S. subprime mortgage market has triggered a credit crunch, and the prospect of a recession slowing global growth.
"We think that probably the worst is over," and that the United States will likely avoid a recession, suggested the manager of the $614-million Dynamic Power Hedge Fund.
Mr. Sehgal's optimism stems partly from a move by the U.S. Federal Reserve Board to continue cutting interest rates. While the Fed cut its benchmark rate last week by only a quarter percentage point, to 4.25 per cent, he expects it could go as low as 3.5 per cent over the next three months.
"In the second half [of next year], we will probably see the economy beginning to grow at a much healthier rate."
He expects that a U.S. economic slowdown will have less of an impact than in the past on the rest of the world - particularly on the so-called emerging BRIC countries of Brazil, Russia, India and China.
The economies of India and China are growing at 8 or 9 per cent annually, he said. "India is being driven by what is happening to an emerging middle class. China is also being supported by this huge investment in infrastructure, and their own consumer spending."
Commodity stocks benefit from demand from the BRIC countries, and continue to be a focus for the Dynamic Power Hedge Fund, whose F series has posted a 60-per-cent average annual return for the five years ended Nov. 30. Eighty per cent of the fund is invested in Canada, 10 per cent in Australia and the rest elsewhere. "We are capturing what is happening in Asia through the Canadian names," Mr. Sehgal said.
The hedge fund differs from his Dynamic Power Canadian Growth mutual fund in that it takes more concentrated bets and buys "riskier" emerging names. The hedge fund has also been investing in potential takeover targets in the mining sector, Mr. Sehgal added. "This is an added bonus."
Although he has the ability to short stocks in his fund, he does not use do it aggressively. "We are using our short ability really more to manage volatility from time to time."
Where he is long:
Mirabela Nickel Ltd. (MNB-TSX) The Australian mining company has operations in Brazil where its Santa Rita nickel sulphide project is "one of the largest greenfield nickel sulphide discoveries over the past 10 years," Mr. Sehgal said. Mirabella, which revised the size of its resource up by 30 per cent last month, is expected to begin production in the second half of 2009, with full production set for 2011. He likes Mirabella's low cost structure, and is also bullish on the price of nickel over the longer term. The company is also appealing as a potential takeover target, given that nickel plays such as Inco Ltd. and LionOre Mining International Ltd. have already been swallowed up, he added. He has a target of $10 on Mirabella. The stock's latest close was down 5 cents at $6.15.
Straits Resources Ltd. (SRL-ASX) He likes the Australian-based mining company as a way to get exposure to thermal coal. "Demand is particularly strong in emerging countries, such as India and China," he said. "China depends on coal as its primary source of power production." Increased demand for thermal coal has pushed the spot price of the commodity to about $88 (U.S.) a tonne recently from $40 earlier in the year. The stock's latest close was down 31 cents (Australian) at $6.30.
Where he is short:
Gammon Gold Inc. (GAM-TSX) The Halifax-based gold and silver producer has operations in Mexico. It's Ocampo project has been "billed as a highly profitable site, with economic feasibility at very conservative commodity prices," but has failed to meet expectations, he said. "Its third-quarter release disclosed lower production, higher costs and ultimately a larger loss than expected." Despite the hiring of a new chief executive officer to try to turn around Gammon, "we believe the company will have a very challenging time meeting even the most conservative market expectations for production and earnings targets," he added. The stock's latest close was down 37 cents (Canadian) at $7.70.
|Two longs and a short|
|SHARE PRICE, DAILY CLOSE, (MNB-TSX)|
|Friday's close $6.15, down 5¢|
|Started trading on March 26|
|SHARE PRICE, DAILY CLOSE, (GAM-TSX)|
|Friday's close $7.70, down 37¢|
|SHARE PRICE, DAILY CLOSE, (SRL-ASX)|
|Friday's close $6.30, down 31¢|
|SOURCE: THOMSON DATASTREAM|
© 2007 The Globe and Mail. All rights reserved.
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