Prem Watsa is betting on U.S. government debt at his Fairfax Financial Holdings Ltd. to guard against deflation amid stagnation in European economies and slumps in commodity prices and Chinese real estate.
Deflation is “in the air,” Watsa said in a conference call with analysts today. “If you have deflation in the U.S., you’d gravitate towards the most secure bonds, which are U.S. Treasuries. We continue to like the Treasury position. It can be significant in terms of making some money for us.”
U.S. government bonds maturing in 10 or more years have returned 18 percent this year, beating the Standard & Poor’s 500 Index. The personal consumption expenditures price index has been below 2 percent for more than two years, resisting policy makers’ attempt to maintain a minimum level of inflation. The threat of falling prices can cause businesses and consumers to be reluctant to spend.
Watsa, who founded Fairfax in 1985, steered the Toronto- based insurer through the financial crisis after correctly anticipating declines of the U.S. mortgage market, and he presided over a 21 percent share gain this year. He said his economic view now is driven by a deflationary environment in at least six European countries.
At the start of the year, International Monetary Fund Managing Director Christine Lagarde warned policy makers in advanced economies to fight the “ogre” of deflation.
Fairfax has been increasing holdings of bonds with longer maturities in a fixed-income portfolio valued at more than $12 billion. As of Sept. 30, about $4.9 billion of the securities, on an amortized-cost basis, were due after 10 years. That compares with $4.2 billion at the end of last year. Holdings declined for bonds due in a year or less.
Fairfax, which invests in assets from Greek malls to life insurers, is prepared for disruption in markets, Watsa said. About $5.9 billion of the company’s investment portfolio, or 23 percent, was in cash or short-term investments as of Sept. 30, according to a financial filing yesterday.
“We look at this whole time period as a one-in-a-100-year event,” Watsa said on the conference call. “Core inflation continues to be at or below one percent in the U.S. and Europe, levels we have not seen since the 1950s.”
He also cited the prospect of worsening conditions in China, where property prices may decline as much as 10 percent this year, according to SouFun Holdings Ltd.
“China’s economy is weak,” he said. “No one knows how weak.”