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.