In spite of numerous risks, including U.S.-China trade tensions, Brexit, declining global growth, and a manufacturing recession, there are plenty of places to find alpha — at least for now.
That’s the takeaway from a star-studded panel at the ninth annual CNBC Institutional Investor Delivering Alpha Conference in Manhattan on Thursday. Over a wide-ranging discussion of the threats facing the global markets, asset managers weighed the risks facing investors, but concluded that there are still places to make money, in spite of increasing anxiety.
“I think we are too pessimistic,” said Emmanuel Roman, CEO of $1.84 trillion bond fund manager PIMCO. “The macro environment isn’t great, but there’s plenty to do.”
Roman said PIMCO likes non-agency mortgage-backed securities, UK bank issues — particularly senior debt and contingent convertibles — and some emerging-market bonds. He says the firm is wary of corporate credit, “but if there is an accident [in those markets] it’s going to take a long time, in my view, to happen.”
Bruce Richards, co-managing partner and CEO of Marathon Asset Management, shared Roman’s leeriness of corporate credit, going so far as to say that there is a bubble in corporate credit. He says his firm, which oversees $17 billion for institutional investors, is “really concerned” with the leveraged loan and high-yield markets, which he called “a ticking time bomb.”
But also like Roman, he sees opportunities in emerging market debt.
“The average debt-to-GDP in emerging markets is 45 percent,” he said. “Half of emerging-market debt is investment grade — even with a global slowdown, I think emerging markets should do well.” He added that structured credit markets and the safer parts of the corporate credit and high-yield markets are also attractive now.
The panelists didn’t have an optimistic view of global growth prospects over the next year, however. Richards said that when looking at several key factors — the inversion of the yield curve, the purchasing manager’s index falling below the critical 50 threshold, $17 trillion worth of government debt trading at negative yields, and the potential of a U.S. trade war with China — “We believe we are heading to a zero-growth environment for the next year.”
Roman said PIMCO thinks growth in the U.S. economy is slowing, and will hold at slightly above 1 percent for the first half of 2020 before picking up in the second half.
“There is only so much monetary policy can do to reignite growth,” he said, noting that he agreed with a comment from J.P Morgan Asset Management CEO Mary Callahan Erdoes that U.S. consumer spending is the bright spot in the U.S. economy. “But capex and manufacturing is already in recession, and it’s difficult. You’ll see a slow first half of 2020 and then things picking up.”
Luke Ellis, CEO of $114 billion, London-based asset manager Man Group, said the firm, which has historically been quantitatively oriented, has made money this year buying bonds. Richards countered that while that may be a money-making strategy, it’s a “fool’s game.”
“Treasuries trading negative is most absurd thing central banks have done and it will blow up in their face,” he said.
Ellis argued that this means central banks have “an enormous incentive” to keep it going for a long time, and that investors have to operate in an environment in which fiscal policy has essentially made money free.
His strategy: “Owning something that’s liquid for the trade so you can get out,” he said. “When this bond rally finishes, it’s going to be horrible, but owning something liquid, you can own it right up to the point where things change. The danger is chasing yield in things that are illiquid.”
Richards said Marathon is taking the opposite tack. “We are raising significant capital in the private markets,” he said.
Of all the risks facing the markets, managers singled out one as being top of mind: falling U.S. consumer confidence. Erdoes noted that the U.S. consumer accounts for 70 percent of U.S. gross domestic product. Richards said waning consumer confidence would be “very worrisome.”
Ellis concurred.
“If there was a recession in the U.S., if the U.S. consumer gives up for whatever reason, markets are not priced for that in any way,” he said.
But until that happens, Erdoes said, money managers have to “seize the moment and figure out how to invest in the market. If you look at the news of where the institutional money is going to, and the way they manage money for all our clients this year, the reality is so that so much money is going into bonds, bonds, bonds — any kind of fixed income. And if you can get them in the private markets, even better.”
