Canada's Fairfax urges caution on markets and economic outlook

Fri Feb 13, 2015 1:57pm EST
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TORONTO Feb 13 (Reuters) - Fairfax Financial Holdings Ltd said on Friday investors ought to be wary about financial markets and the global economic outlook, as the huge oil price slide over the last six months has led to a global deflationary environment.

The Toronto-based financial services holding company, led by well known contrarian investor Prem Watsa, on Thursday reported a record annual profit of $1.6 billion and solid cash balances, sending its shares up 1 percent to C$641.57 on Friday.

The results prompted Cormark Securities analyst Jeff Fenwick to boost his price target on Fairfax to C$740 from C$575 and his rating on the stock to a "buy" from "market perform." He noted that the company continues to produce strong investment gains, despite a defensive investment positioning.

Watsa, a devotee of the value investing style favored by Warren Buffett, made billions for Fairfax by correctly calling the 2008 financial crisis. But he missed out on some of the subsequent stock market rally by hedging the company's equity exposure.

Asked on conference call on Friday about the firm's defensive positions and decision not to further deploy some of its cash at this time, Watsa said Fairfax was on the sidelines as it does not currently see enough opportunity.

"Every time we buy a stock or a bond, we are looking for protection on the downside and right now our view is there is very little protection on the downside," said Watsa.

He noted that the price of oil dropping from $100 a barrel to $50 a barrel was totally unexpected for most people, but said Fairfax had warned in its annual report last year that commodity prices could collapse.

"The price of oil coming down we think is not only (due to) supply in the United States, but it also reflects decreasing demand from China," said Watsa.

He argued that the decline in oil is not an isolated event impacting just one sector, but one with much deeper implications for the global economic environment. He sees many people, including some central bank heads, being caught off guard by the extent of the deflationary risk.

"In 2006-07, you may have thought we were totally wrong, but of course things changed in 2008 and some companies did not make it," he said. "We don't want to ever be in a position like that. We think that there are a lot of unintended consequences here." (Reporting by Euan Rocha)