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The Best of GMTL: 5 Top Investment Managers Offer Their Views

BlackRock, KKR, PIMCO and other Global Market Thought Leaders share insights and analysis on the housing market, commodities and more.

The New Logic of M&A

With some $1 trillion in global announced deals as of the end of the first quarter, M&A activity is at the highest level seen since 1998 and nearly double that of a year ago. Much of this is on the back of pent-up demand after corporations shored up cash on their balance sheets during the post-financial-crisis recession. The subsequent reduction in uncertainty about how surplus capital will be used can lead to a bump in share price, says Gerry Paul of AllianceBernstein. “The balance sheets of both acquirers and their targets are flush with cash, whereas the opportunity cost of capital — as measured by the return that companies get on cash — is next to nothing,” he writes.

Ukraine crisis: commodities prices go against the grain

Commodities markets that rely heavily on supply from Russia, such as oil, have faced few to no headwinds from the outbreak of the crisis in Ukraine in late February. But during the same period, prices for corn and wheat — two commodities produced in Ukraine — have gone up 10 and 21 percent, respectively. Also playing into the grain price jump: a hotter and drier spring than normal in the southern Great Plains in the U.S. But other countries offer cheaper grain options, and once summer gets under way, El Niño weather patterns in the U.S. will likely be easier to discern. “Investors looking to take a view on the future price of wheat or corn should do so through the options market,” write Nicholas Johnson and Gillian Rutherford of Pacific Investment Management Co. “Being long on wheat puts is a solid way to implement our short wheat strategy.”

Postcrisis or Precrisis: What Describes Today’s Hot Credit Market?

The U.S. economy is still feeling the aftereffects of the 2008–’09 financial crisis. The federal funds rate is scraping zero, and although the unemployment rate for April 2014 — 6.3 percent — is at its lowest level since September 2008, it is significantly higher than the 4.7 percent seen in September 2007. Despite the continued economic uncertainty, spreads in the credit market have tightened, hovering near the lows between 2004 and 2007, raising the question: Are we in a precrisis or postcrisis market? Whatever the answer, Christopher Sheldon of KKR suggests caution: “Maintaining a solid grip involves three key points: knowing our credits, doing our homework and only taking risk that is fairly compensated.”

Student Loan Debt and Its Effect on the Housing Market Recovery

Residential housing, the sector that in large part unraveled the U.S. economy into the financial crisis, could be a ticket to sustained recovery. A revived housing market means more jobs — and a macroeconomic knock-on effect. Housing data has improved to the point where Federal Reserve chair Janet Yellen cited it during a recent address to Congress, yet declining homeownership numbers are a cause for caution. A reason for this, argues BlackRock’s Rick Rieder, is that student loans cut into the finances of would-be first-time homebuyers. “While a college graduate is likely to see 1.8 times the lifetime earnings of a worker without any college,” he writes, “if that graduate has incurred significant student loan debt, it diminishes much of that economic advantage.”

Saudi Arabia Drills Down to Its Core

Saudi Arabia has the 19th-wealthiest economy in the world and is the only oil-producing nation to have sizable spare capacity. But, as Tom Nelson of Investec Asset Management points out, an overlooked resource of the nation is its young population. “The exciting perspective of Saudi Arabia is not the legacy oil wealth under the desert but the implications for the young population living above it,” he writes. Efforts by foreign companies operating in Saudi Arabia to hire more locals stand to lower the 30 percent unemployment rate in the 20-to-25 age bracket. At the same time, oil will need to remain near $100 per barrel for the country to maintain its regional geopolitical influence. • •

Read more from this series at institutionalinvestor.com/gmtl.

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