Panel, Conference Presentation
Discovering Value in Turmoil
Milken InstituteGregory Zuckerman, Glenn August, John Calamos Sr., Matthew James, Matthew Natcharian, Anne Walsh
- Glenn August anticipates China's economic transition to a consumer services model will persist for many years, while noting a 75% probability of a low-growth environment without immediate recession, though he warns of potential exogenous shocks akin to an oil shock that could trigger significant volatility.
- John Calamos projects a slow-growth global economy rather than a recession, maintaining a position in convertible securities for downside protection and readiness for potential rate increases, while acknowledging the difficulty in predicting specific market tops.
- Matt Necharian expects an increase in trading costs and entry/exit times as risk capital retreats from the system, predicting that asset managers will need to adopt strategies with the option value of cash to manage volatility.
- Ann Walsh forecasts that global rates will continue to decline and potentially turn negative due to persistent monetary stimulus, while asserting that liquidity in ETFs is a myth that may create volatility and result in in-kind distributions during market stress.
- Wayne warns that generating consistent returns of 10%, 15%, or 20% will be difficult in a low risk-free rate environment, creating challenges for pension allocators requiring 7% to 8% returns and suggesting a shift to low volatility strategies with downward protection.
- Greg Zuckerman predicts that while slow growth currently supports high-yield credit, industry-specific issues and defaults will emerge beyond the energy sector over the next two years, offering increased security selection opportunities in CLOs with energy exposure ranging from 2% to 22%.
- Matthew James predicts credit will outperform equities over the next 12 months, identifying CLO Mezzanine paper and leveraged loans as the most attractive assets, with equity returns likely confined to single digits and credit following a similar trajectory.
- Matthew James asserts that AAA CLO tranches would only face losses if annual default rates reached 10% to 12% over the next five years, noting that CLO Mezzanine paper is trading at 800 to 1200 basis point spreads.
- Glenn August describes a scenario of "enormously significant, very rapid" market moves driven by asset class correlation and liquidity mismatches, suggesting that a turmoil event could see U.S. equities down 10%, European markets down 10% to 15%, and China down 15% to 20%.
- Glenn August notes that maturity dates have been pushed out and covenant structures will drive volatility in distressed areas, creating trading opportunities, while cautioning that limited policy tools remain if an exogenous shock occurs.
- John Calamos highlights the risk of inflation returning, which would shift volatility to the bond market rather than equities, and observes that the Fed has failed to achieve target inflation despite lowering rates to zero.
- John Calamos mentions that gold has become an alternative store of wealth for individual investors seeking protection against negative yields, though he admits a lack of specific insight into the asset.
- Matt Necharian suggests that volatility will be a friend to investors, anticipating more V-shaped market moves as the industry adapts to the withdrawal of risk capital.
- Ann Walsh suggests that investors currently perceive insufficient compensation for risk, which implies a future dislocation in markets as the perception of risk compensation fades, despite the opportunity to buy credit within a 1% to 3% growth range.
- Ann Walsh projects that companies possess significant runway to borrow at very low rates due to the current monetary stimulus environment.
- Wayne predicts that credit hedge funds will shift toward more patient mandates with longer terms, moving away from short liquidity structures such as 30-day or 90-day liquidity options.
- Glenn August cautions that Deutsche Bank's situation is reminiscent of the Bear Stearns crisis in 2008, indicating continued volatility driven by the European financial system.
- Matthew James expects a low-growth world where equities yield single-digit returns, reinforcing his view that credit offers a superior total return opportunity over the next 12 months.
- Ann Walsh predicts that the SEC may challenge or change liquidity elements in ETFs, which could lead to investors receiving in-kind distributions during volatile periods rather than cash.
- Greg Zuckerman notes that the distribution of spreads in lower CLO tranches is widening, creating diverse security selection opportunities despite the energy sector's current visibility on defaults.
- Glenn August indicates that a 10-year Treasury rally of 50 basis points reflects the current possibility of stagflation or low growth, even if a U.S. recession is not immediately certain.