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Deutsche Bank’s BRIC Bear Smith Leaves to Start Own Firm

John-Paul Smith, the Deutsche Bank AG strategist whose bearish forecasts on emerging-market stocks put him at odds with most of his peers on Wall Street, is leaving the bank to start an independent research firm.

Smith, who joined Deutsche Bank in 2010 from Pictet Asset Management, is forming Eclectic Strategy with his former Pictet colleague Emad Mostaque, he said in an e-mail to Bloomberg News. Smith was previously at Morgan Stanley, where he correctly forecast Russia’s stock-market crash in 1998.

The London-based strategist’s prediction that developing-nation equities would trail their U.S. counterparts because of state intervention and a weaker Chinese economy has proved prescient as the MSCI Emerging Markets Index lost 8 percent since the end of 2010, versus a 58 percent surge in the Standard & Poor’s 500 Index. (SPX) He’s sticking to that view even after the developing-nation index climbed to a three-year high this month.

“Most emerging markets are now trading ahead of the underlying fundamentals,” Smith wrote in his last report for Deutsche Bank dated Sept. 3. “The latest rally is another false dawn before increasing concern about the underlying condition of the Chinese economy causes liquidity to be withdrawn from the asset class.”

Emerging-market stocks declined for an eighth day today, the longest losing streak in 10 months, as Chinese factory and retail sales figures signaled the world’s second-largest economy is slowing. The MSCI gauge dropped 0.4 percent at 10:40 a.m. in Hong Kong, extending its retreat from its Sept. 3 high to 4 percent. The index is still up 5.4 percent this year.

Oxford, Rothschild

Eclectic will offer analysis on emerging and frontier markets to both institutional and individual investors, Smith said, without providing further details. Mostaque, who worked as a strategist at Noah Capital Markets after Pictet, will focus on the Middle East and geopolitics, Smith said.

Candice Sun, a spokeswoman at Deutsche Bank, declined to comment.

Smith has had a three-decade career in the securities industry. Raised in the English town of Glossop, near Manchester, he studied modern history at Oxford’s Merton College before going to work as a European fund manager with Royal Insurance in 1983. From there, he did stints at TSB Investment Management, Rothschild Asset Management and Moscow-based Brunswick Brokerage, before moving to Morgan Stanley in 1995 as a Russian equity strategist.

Bearish Outlook

He later joined Pictet as head of emerging-market equities, where funds managed by his team almost quadrupled to $9 billion between 2001 and 2005. His Eastern European Trust Fund, with 40 percent of its assets in Russian equities on average, outperformed the MSCI Emerging Market Eastern Europe dollar index by 1.5 percentage points at the end of 2005.

At Deutsche Bank, Smith’s pessimistic outlook on emerging markets during the past four years often clashed with more bullish peers. Adrian Mowat, the chief Asia and emerging-market strategist at JPMorgan Chase & Co., wrote in an Aug. 28 report that the MSCI emerging markets index may climb to 1,200 by the end of this year, or 13 percent above its closing level last week. Morgan Stanley’sJonathan Garner wrote on Sept. 8 that the index may reach 1,160 by September 2015.

In his last report with Deutsche Bank, Smith said investors will have few places to make money in emerging markets if his view on a deteriorating Chinese economy proves correct.

“From an EM perspective at least, dollar cash does not appear a bad place to hide,” he wrote.

http://www.bloomberg.com/news/2014-09-15/deutsche-bank-s-bric-bear-smith-leaves-to-start-own-firm.html