Conference Presentation, Panel
Asia Summit 2015 - Treasure Hunters: Finding Value in Today's Market
Milken InstituteTom Finke, Paul Horvath, Rob Petty, Takumi Shibata, Hans Paul Birkner, Mike Milken, Chris Langer, Stefan Kostjusko
- Investors expect long-term value generation rather than quick large gains, with specific targets of 20% average portfolio yield in China and 18.8% in India for top-of-cap structure deals in Asian markets.
- The Asia-Pacific region is anticipated to offer better relative value in high-yield and private credit compared to the U.S. and Europe due to fewer market participants within a $35 trillion market where 70% consists of loans.
- Shadow banking in China is projected to have grown 74% over the past five years and is expected to become the fastest-growing capital market sector by replacing bank lending, driven by non-bank finance companies and fintech firms in India and China.
- Global growth is forecast to remain between a decline of 50 basis points and 2% through the cycle for an extended period, potentially leading to a "Japanification" of less developed economies.
- Geopolitical instability is predicted to define the next 25 years, necessitating a multi-asset allocation strategy with a geopolitical overlay, while the subsequent 20 years are expected to favor high-conviction investments targeting index beats of 6% globally and 8% in Asia.
- Banks are expected to remain vital in originating, servicing, and underwriting loans, with the top 30 global banks facing a $4 trillion capital requirement problem requiring partnerships with asset managers to offload risk by 2018 to comply with Basel III rules.
- Central bank intervention is projected to persist indefinitely with no outlook for balance sheet normalization, leading to predictions that monetary policy, commodity prices, and consumer goods prices should be disregarded in favor of central bank-driven financial architecture.
- Equity investment is considered less certain than post-World War II trends, prompting advocacy for significant allocation shifts into private credit to avoid reliance on global growth.
- Direct lending offers compelling yields but carries risks due to new entrants lacking the 200 to 300 lawyers and workout specialists required by established banks to manage risk effectively.
- Japan currently presents a zero or negative GDP gap creating a short-term five-year opportunity, though long-term investment in the country over the next 20 years faces challenges from rising social welfare bills.
- Market volatility in the loan-dominated Asian credit space is expected to create opportunities for contrarian investors capable of profiting during downturns, while regulators are advised to foster long-term funding sources like pensions to support regional infrastructure growth.
- Future returns in Japan are projected to be difficult to achieve as the country faces significant social welfare costs, contrasting with the potential for asset management companies to build net asset values in India and China.