Hugh Hendry: Steer clear of China and gold stocks

Hugh Hendry has always tried to position himself "outside the accepted belief system". He started his own hedge fund, Eclectica, almost a decade ago, and has a history of making contentious calls that prove prescient.

Over ten years ago, keeping in mind assets' tendency to revert to the mean and move in long-term cycles, he decided that a boom in real assets was due. His new emphasis on commodities and gold paid off as China soared.

He also raised eyebrows by recommending Treasuries after 2006, reasoning that if gold was going to go ballistic, something awful would have to happen before central banks printed money. Lehman's subsequently collapsed and there was a rush towards government bonds.

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So what's on his mind now? He is "fearful" of what could befall China. China gambled that it could tide itself over with its lending spree while the West went through its recession, and return to export-driven growth once the West recovered.

Unfortunately, the West hasn't been able to muster a sustained recovery, leaving the Chinese economy without momentum and beset by pervasive overcapacity and debt. The upshot? China looks vulnerable to a sharp drop in GDP.

Also on the subject of China, Hendry isn't fazed by the widespread fear that the government could crash the dollar by selling its vast stock of US Treasury bonds. If it does that, "the renminbi goes higher and higher and higher...[and China's exporters] go bust".

Hendry remains long gold, but unlike MoneyWeek, he is short gold-mining equities. As gold rises, governments become more likely to eye miners' gold assets enviously and perhaps confiscate them, he reckons. If you're bullish on gold, concludes Hendry, buy exchange-traded funds(ETFs), futures or bullion.