Is this hedge fund manager right, will UK stocks really fall 80%?
Crispin Odey is the billionaire hedge fund manager who made a name for himself by spotting early on the effects of the US sub-prime crisis on British banks before the financial crisis. And he isn't what you would call shy about voicing his opinions. In the run up to the UK referendum vote on June 23, Odey was a vocal Brexit supporter, and since 2008 he has continually criticised the role of central banks before, during and after the crisis.
Odey's latest proclamation is against the UK economy and capital markets. Despite the fact the fund manager wholly supported Brexit, and made £220m in a single day after the referendum result became known, he now believes the UK is "destined for recession."
Specifically, in his monthly letter to the clients of his hedge fund, Odey wrote: "We are now destined to have a recession in the UK as well as inflation." He continued: "These times are getting interesting. The FTSE 100 share index is now up 30% over five years, whilst earnings have fallen by 80%. On an earnings yield of 1.6%, the stock market could fall by 80% and, provided profits did not fall, would be on a 13x P/E multiple."
So, one of the most outspoken Brexit supporters is now claiming that the UK will deeply regret its decision to turn its back on Europe. To add insult to injury, Odey is betting against the UK market.
Betting against the UK
Odey Asset Management manages around £7bn for clients and has significant short positions in leading UK companies such as ITV, Intu Properties and Tullow Oil.
What should investors make of his bold claim? Well, for a start, he's not the City star he once was. While he may be worth more than £1bn, his leading hedge fund has lost 40% this year following a mid-teens loss last year.
Further, there's something rather misleading about the prediction. An 80% fall in the FTSE 100 would take it down to levels not seen since the late 80s. Even during the financial crisis, when the very existence of the global financial system was being questioned, the FTSE 100 dropped by around 50%.
The FTSE 100 is an international index, more than half of the profits generated by its constituents come from overseas. If the UK does collapse into recession, it's unlikely it will take the rest of the world with it and foreign earnings will continue to support the FTSE 100.
The bottom line
Overall then, Odey's prediction that the FTSE 100 could fall by as much as 80% seems to be nothing more than scaremongering. Even if there is a recession in the UK, unless a financial crisis-style depression re-emerges, there's no reason to suggest that the index could lose more than half of its value.
Make money, not mistakes
If Odey's prediction worried you then the best course of action to take is to think about your options before making a knee-jerk decision about your investments. Indeed, a recent study conducted by financial research firm DALBAR found that the average investor realised an annual return of only 3.7% a year over the past three decades, underperforming the wider market by around 5.3% annually thanks to poor investment decisions.
To help you streamline your investment process, realise and understand the most common investor mis-steps, the Motley Fool has put together this new free report entitled The Worst Mistakes Investors Make.
Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended ITV. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.