Veteran hedge fund manager Crispin Odey believes Britain is destined to have a recession, leaving richly valued stocks vulnerable to sharp declines, he said in a letter to investors.
London-based Mr Odey said the Bank of England had engineered an unsustainable situation in which company earnings had fallen but the stock market continued to rise.
“These times are getting interesting. The FTSE 100 share index is now up 30% over five years, while earnings have fallen by 80%,” wrote Mr Odey.
The FTSE 100 is trading at 15.8 times forward earnings, a 13% premium to its average over the past three decades.
For the index to trade at 13 times earnings, close to its long-term average multiple, and provided profits did not fall further, Mr Odey said stocks could fall up to 80%.
Bank of England governor Mark Carney should be raising interest rates to counter the growing difference between inflation next year and today’s interest rates, he said.
“What the UK is promising is rising wages, recession, inflation and falling profits,” wrote Mr Odey.
“Not exactly the prize that ticket holders in the FTSE and the gilt market have paid up for.”
Mr Odey had previously told Reuters Britain’s vote in June to leave the EU would allow it to navigate a slowing global economy better.
In his letter, he said: “On the back of the uncertainty for overseas investors in UK Plc following on from the Brexit result, the current account deficit is ballooning and the budget deficit is following.
“As sterling falls against all its trading partners’ currencies, it is mechanically ensuring that inflation rises up through 3.5%.”
Britain’s annual consumer price inflation rose to 1% in September from 0.6% in August.
The Bank of England cut rates in August for the first time since 2009 to help cushion the economy after Brexit.
Mr Odey’s (€369m) Opus Fund made gains of 1.1% in September, the letter showed, and held 28% of its assets in cash.
© Irish Examiner Ltd. All rights reserved