Money managers at the virtual Milken 2020 Global Conference were largely bullish about stocks, but they outlined a litany of risks facing investors.
Uncertainty on multiple fronts is leaving investors trying to position for a range of outcomes—even the possibility of burgeoning debt loads leaves the U.S. facing a systemic financial crisis or a move toward socialism.
The annual conference, sponsored by former junk-bond investor Michael Milken’s Milken Institute think tank, brings together business leaders, policy makers, money managers, and Wall Street power brokers and is taking place online through Oct. 21.
Myriad uncertainties created by the variance in how countries were dealing with the pandemic, populism, geopolitical tensions, and broader divisiveness are forcing investors to grapple with an array of outcomes as varied as a multidecade growth slump or 1970s-style stagflation and requires “an enormous” amount of diversification, said Bridgewater Associates CEO David McCormick.
CEO Kewsong Lee called out the uneven nature of the recovery, even within asset classes and sectors. And while the 2008-09 financial crisis saw a lot of solvent companies become illiquid, the massive stimulus this year has left a lot of insolvent companies that are liquid—including many in industries with existential issues ahead, Lee said. That requires caution as investors look through battered industries.
A lot depends on the trajectory of the virus, but Agnès Belaisch, Barings Investment Institute’s chief European strategist, played down the magnitude of the risk posed by recent rise in Covid-19 cases in Europe. At the beginning of the crisis, about 40% of the population was furloughed, but that is now down to just 6%. “It’s a slow process, but a process back to normal,” Belaisch said. She argued that European policy makers’ ability to get monetary and fiscal policy through without talk of austerity and a focus on improving productivity to boost economic growth was a “philosophical, cultural, societal change.”
Mohamed El-Erian, chief economic advisor at Allianz, was less sanguine, describing the European measures as a paradigm shift—but a tiny one. His concern: There is “way too much risk-taking,” calling out the popularity of special purpose acquisition companies, or SPACs, and Hertz’s share offering while in bankruptcy. “When you are all in, it isn’t a multi-round policy response, and that is the problem,” El-Erian said. “Financial stability is at play—collateral damage—and we may run out of bullets in some countries before [we] run out of problems.”
Others like Guggenheim Chief Investment Officer Scott Minerd sounded an alarm about the “irrational pricing” of capital, which is causing both companies and municipalities to pile on debt on already high levels, leaving the U.S. two unsavory long-term options: “You end up with systemic risk, which means you have something akin to a financial risk or go down the road of socialism, which is politically destabilizing and would change Americans’ lives for the foreseeable future.”
Conference participants also shared some of the opportunities they see. Among the areas in which Carlyle has been active: Investing more than $1 billion in growth companies in India and China and in growth opportunities globally in health care and technology.
Steven Tananbaum, chief investment officer at Golden Tree Asset Management, sees credit opportunities in the energy patch, including oil services, which are being priced as the current oversupply is never going to be rationalized.
Latin America has been hit especially hard by the pandemic, with the latest International Monetary Fund outlook not seeing a return to pre-pandemic economic activity until 2023. But Tananbaum is finding opportunities in Argentina, which has restructured its debt and is trading lower than where it started the year in default. Also attractive: the debt of Mexican state-owned oil firm Pemex, which yields four times that of its parent, the Mexican government.
When looking at credit spreads versus 35 years ago, credit is still cheap, Minerd said. High-yield debt yields could fall to as low as 1.5%, while Treasuries could dip into negative territory—and with yields falling, Minerd doesn’t see inflation as a risk in the next few years.
That sets up stocks to move “substantially” higher. But as the economy comes back online, the money that has flocked to the high-profile technology stocks driving the market will eventually give way to let other parts of the market catch up. “If you are in equities, consider a rotation into more value-oriented [stocks], but that is a trade. Technology in the long run is the place to win,” Minerd said.
Another factor supporting stocks: the roughly $4.5 trillion in money-market funds, with a lot of cash on sidelines among both retail and institutional investors, says Catherine Keating, CEO of BNY Mellon Wealth Management. While there has been a lot of talk about whether there is a disconnect between the booming market and the still-struggling economy, Keating said the disconnect was nothing new, with stocks looking forward and economic data looking backward. “And the stock [market] is megacap America, and half of America works in small businesses, so there is always been a disconnect,” she says.
But from her viewpoint, a V-shape recovery is already playing out in housing, manufacturing, technology, and durable goods—all of which should propel broader economic growth.
Write to Reshma Kapadia at [email protected]