Fairfax Financial Holdings Inc. chief executive Prem Watsa still has deep concerns about the shape of the world's economy.
The insurance and investments company's hedged common equity exposures kept it on the sidelines in 2013, while financial markets soared. The S&P 500 was up 30 per cent last year, while Fairfax had a total investment return of minus-4.9 per cent.
But investors were warned that the company's extensive hedging initiatives aimed at protecting the company's investments from a volatile global economy would have costs, Mr. Watsa said in a letter to shareholders released on Friday. "Our time will come again!" he wrote.
Fairfax made a major bet on BlackBerry Ltd. this year, but more broadly the tech sector is a pocket of concern to Mr. Watsa. He is wary of the high market caps of companies such as Amazon and Tesla, which haven't proven their ability through earnings. He called Facebook Inc.'s $19-billion (U.S.) purchase of WhatsApp the "poster child for the excesses that prevail in the tech world!"
Outside of tech, the rest of the U.S. economy isn't so hot, by Fairfax's view. Economic growth is low, the debt-to-GDP ratio is high, and the quantitative easing efforts by the Federal Reserve to plump up the economy haven't been effective, Mr. Watsa writes. "The world might muddle through as it did in 2013, but the grand disconnect between stocks and bonds, and the real economy, continues," he said.
Mr. Wasta also expressed continued concern for the Chinese housing market, which is a bubble that could burst any time, he said.
He included some observations about the market made by Beijing-based Anne Stevenson-Yang, founder of boutique research firm, J Capital Research. She noted that China built about 20 million new housing units in 2012 – 10 times what the U.S. built annually at its peak. And many of the cities Ms. Stevenson-Yang has visited are peppered with empty units.
"This real estate boom could only be financed through unrestrained credit growth. Since 2009, the Chinese banks have grown by the equivalent of the entire U.S. banking system or 15 per cent of world GDP," Ms. Stevenson-Yang noted.
Should that market crash, it would be detrimental to many economies through the rest of the world, including commodity-reliant Canada.
And when this happens, Mr. Watsa is counting on Fairfax's hedging to protect its common stock portfolio from declining as much as the indexes. Meanwhile, Farifax will seek out buying opportunities.
"When problems hit, only those with cash and very liquid assets can take advantage of them," he wrote. "While it is very painful and costly waiting, we think your (and our!) patience will be rewarded."
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