Canadian Investor Prem Watsa Sees High Risk of Recession in North America and Europe

Prem Watsa, one of Canada’s most prominent investors, sees significant risk that North American and European economies may slip back into recession, as governments run out of ammunition to spur growth.

Recent economic engines, such as fiscal and monetary stimulus and strong Chinese demand for commodities, are running out of steam, the Fairfax Financial Holdings Ltd. chairman said in an interview.

With China’s growth slowing and interest rates near zero percent, “there is nothing to fall back on now if the U.S. and Europe slip back into recession,” he said.

Mr. Watsa struck a more bearish view than closely followed U.S. investor Warren Buffett, to whom he is often compared. Mr. Watsa said economic conditions are the most troubling he has seen since he founded his Toronto holding company 30 years ago.

He has grown so concerned about signs of distress in commodities, housing and high-yield and emerging bond markets that he fears “much pain” is coming to the financial markets.

Mr. Watsa’s outlook stands in contrast to that Mr. Buffett expressed in his closely watched annual letter to Berkshire Hathaway Inc. shareholders late last month. Mr. Buffett highlighted his optimism about Berkshire Hathaway’s performance and the future of the American economy.

Fairfax, which has a variety of holdings in the insurance, travel and restaurant sectors, as well as in smartphone maker BlackBerry Ltd., has “battened down the hatches” with such moves as setting aside $1 billion in cash and marketable securities, Mr. Watsa said. The company is also placing derivative bets on deflation.

In a 20-page annual letter to Fairfax’s shareholders, released on Friday, Mr. Watsa said he was motivated to warn about market instability after he learned that a friend’s 90-year-old mother had been advised to invest 85% of her investment portfolio in stocks.

“Yes, 85%!” Mr. Watsa wrote. Although she declined Mr. Watsa’s advice to reduce her exposure, he said “I have not given up on changing her mind -- but it will not be easy!”

The biggest risk facing global economies, he said, is collapsing commodity prices, as production continues to outstrip demand. Although oil prices recently improved after plummeting since mid-2014, he said “I wouldn’t be surprised if oil prices go down again.”

U.S. oil prices hit a high for the year on Friday after the International Energy Agency suggested the recent market rout may have come to an end.

Canada is particularly vulnerable to an economic slowdown because of its heavy dependence on oil and mining exports, as well as the potential for a correction to its lengthy housing boom, Mr. Watsa said.

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