George Soros (Trades, Portfolio)’ former partner Stanley Druckenmiller (Trades, Portfolio) shares his bullishness on gold but also bet a sizable amount of funds on emerging markets in the first quarter.
Druckenmiller, a macro investor, told the Ira Sohn conference last week that he is wary of the short-term future of the stock market.
“The bull market is exhausting itself… the Fed has borrowed from future consumption more than ever before. It is the least data dependent Fed in history. This is the longest deviation from historical norms in terms of Fed dovishness than I have ever seen in my career,” Druckenmiller said.
Druckenmiller closed his Duquesne Capital Management to outside clients in 2010 after a 30-year career. From 1986 through several years leading up to the closure, Druckenmiller had averaged returns of 30%.
Druckenmiller is mainly a macro investor who wagers on global trends he perceives, explaining his interest in gold. He has almost a fifth of his portfolio in call options on the SPDR Gold Trust (GLD, Financial). But Druckenmiller has also moved considerable assets into emerging markets.
In the first quarter, he bought 2,971,000 shares of the iShares MSCI Emerging Market income ETF (EEM, Financial) at a cost of around $101.8 million. The holding, which made up 7.6% of his portfolio at the end of the quarter, became his third largest, behind gold and Facebook (FB, Financial).
The position has seen little movement as of Thursday afternoon, with the ETF’s price up 3% from the first-quarter average of $31 per share. Over the past five years, the ETF has slumped 32%.
Investors tracked by GuruFocus seemed split on the investment in the first quarter, with four, including Druckenmiller, starting a new position in the ETF and four, including Leon Cooperman (Trades, Portfolio) and John Burbank (Trades, Portfolio), selling theirs, though Burbank maintains call options. Ray Dalio (Trades, Portfolio), head of Bridgewater Associates, has the biggest emerging markets position, with almost 43 million shares worth almost 19% of his long portfolio.
The iShares MSCI Emerging Markets ETF geographic exposure is dominated by China at 24% of holdings, followed by South Korea at 15%. The biggest of its 849 positions are Samsung Electronics Ltd. (XKRK:005930, Financial), Taiwan Semiconductor Manufacturing (TPE:2230, Financial) and Tencent Holdings (HKSE:00700, Financial).
Of the global economy, the Asia Pacific region is poised to grow the fastest and produce the biggest gains for foreign direct investment in the next decade, according to research firm HIS. Researchers expect the region to grow at an annual rate of 4.5% per year, with four Southeast Asian nations – Indonesia, Malaysia, the Philippines and Thailand – set to exceed $1 trillion in GDP by 2030.
IHS also expects China and India to lead outperformance, despite concerns about their economies.
“In China, despite the slowdown evident in the manufacturing sector, strong growth in consumer spending is driving rapid growth in service sector industries such as financial services, healthcare, retailing, e-commerce and logistics,” IHS researchers said. “
China’s service sector industries are expected to continue to show strong expansion over the medium term outlook, helped by continued rapid growth in consumer spending, with overall Chinese GDP growth forecast to average 6.4 percent per year between 2016 and 2020.”
The outlook would constitute a significant change from 2015, when volatility defined China’s market. In the first quarter, investors continued their concern over the country’s economic health, declining GDP and lower Purchasing Manager’s Index, Matthews China Fund (Trades, Portfolio) managers Andrew Mattock, Winnie Chwang and Henry Zhang said in their first-quarter letter.
“However, when taking a longer-term view on the economy, we continue to believe that the appropriate long-term steps toward gradual but deliberate economic reforms are being taken,” managers said. “The transition toward a consumption- and services-led economy has resulted in a noticeably rapid development in these value-adding industries.”
Matthews China also said it as stabilization progresses they see reasonable valuations for companies in the MSCI China Index, with price-earnings ratios less than 10 and dividend yields around 3%. The MSCI Emerging Markets ETF Druckenmiller invested in has an average price-earnings ratio of 11.3 and distribution yield of 3.2%.
See Stanley Druckenmiller (Trades, Portfolio)'s portfolio here. Start a free 7-day trial of Premium Membership to GuruFocus.
