“It is meant to be an imperfect hedge for my long positions in deep value equities, things like Ladbrokes and Statoil,” he said. “Given the renminbi had experienced real exchange rate appreciation and there are large capital outflows in China, [the currency] seems overpriced with a negative catalyst. But we are aware these are decisions with other factors involved.”
Mr Clunie acknowledged that the sharp drop in the currency’s value in mid-August had made him wary of maintaining the position, but he said he was doing so nonetheless.
“Although my instinct when you make money quickly by buying something that’s underpriced and revalued quickly [is to trim the position], I am left thinking I need this hedge. If there is [another] devaluation or global deflationary shock, underpriced value stocks will keep falling. So long as I hold those, I need to keep this hedge.”
Acknowledging the wider repercussions of a further fall, as demonstrated by August’s ripple effect, was also on Mr Mabbutt’s mind: “You can look elsewhere. Very broadly speaking, it would have a deflationary impact, which is to say maybe G10 government bonds would do well were that to happen.”
The manager added a more competitive Chinese currency would lead to more trouble for other Asian currencies. As a result, he is short the Taiwanese dollar and recently began shorting the Philippine peso.
The investors agree the risk has become more widely acknowledged but are split on the cost of specifically betting against the currency. Mr Mabbutt said he may increase his short position further, saying it is “not hugely burdensome” to short the renminbi. Mr Clunie, however, said his put option has risen from 0.25 per cent of his portfolio to 1.25 per cent since the devaluation.
“I think it is now fairly priced. I am not sure I would buy it anew, but I am [maintaining it] given I need a hedge against this scenario.”
