Global Capital Markets 2019

Geopolitical Drivers of Populism

• Sir Michael identifies the global financial crisis as the root cause of rising nationalism and populism, arguing that intergenerational borrowing has widened the Gini coefficient and created capital disparity.
• The resulting "disparity" drives voters toward "governmentalist" or nationalist socialist policies when they perceive that future generations will not be better off.
• Populist voting shares are rising globally across Latin America, Europe, and the US, creating divergent country-specific investment opportunities.
• This political fragmentation creates a "policy vacuum" in the West, which the panel notes allows China to increase its global effectiveness.

China's Market Evolution and Investment Outlook

• Mark Machen projects China will represent 20% of global GDP by 2025 and 25% by the mid-2030s, driven by its 50% share of the global workforce and 60% of global growth.
• China's bond and equity markets are now the second largest globally, with MSCI and Bloomberg leading index inclusion to make the market more investable for foreign capital.
• Elif highlights specific ownership reforms: foreign ownership limits in securities and asset management firms are being lifted (51% currently, 100% soon), and restrictions on electric vehicle manufacturers are scheduled for abolition over the next three years.
• Foreign ownership of Chinese A-shares currently stands at only 2.6%, compared to 30% in Japan and 39% in Korea, indicating significant potential for capital inflow.
• The panel notes China has recently begun running a current account deficit, a necessary condition for becoming a global reserve currency.

Risk Factors and Macroeconomic Cycles

• Mark identifies three short-term risks for China: simultaneous regulatory clampdowns on shadow banking/deleveraging, the potential for escalated US-China trade tariffs (up to 25%), and geopolitical tensions in the region.
• Long-term risks for China include a demographic decline where the workforce has already peaked and population will peak within 10 years, and uncertainty regarding the political succession process.
• Joe Atanasio notes that while equity valuations (P/E) were in the 90th percentile in late 2018, they have corrected to the 74th percentile, though credit spreads have not yet fully normalized.
• Credit markets are facing structural risks: subordination has dropped from 40% to 20%, and covenant-lite loans have surged from 17% to 78% of the market.
• Leverage in senior secured debt has crept to 4.4x (up from 3.6x), prompting warnings of lower recovery rates in the next cycle similar to 2007.

Public-to-Private Capital Migration

• The number of listed US companies has halved since 1997, while private assets now comprise approximately 65% of Mark Machen's portfolio (with 50% in Level 3 assets).
• Panelists argue that the decline in US listings is offset by the rise of listed companies in China and other emerging markets, with total global listed companies growing significantly over the last 40 years.
• The shift to private markets introduces liquidity risks; panelists warn that during downturns, public markets may become illiquid for pension funds and sovereigns attempting to fund private asset obligations.

Market Structure and Passive Investment Trends

• The rise of passive investment strategies (ETFs) has distorted valuation logic, driving loans to trade at spreads similar to bonds despite fundamental differences.
• Active managers view passive inflows as a source of volatility and inefficiency, creating "event-driven" and "idiosyncratic" arbitrage opportunities in distressed debt, emerging markets, and structured products.
• Passive strategies have not yet proven superior to active management in credit markets, where active managers historically outperform benchmarks by 80% (compared to 36% in equities).

Technology and Disruption in Finance

• Sell-side institutions are adopting robotic process automation and AI to reduce costs and increase execution speed, moving from "million trades in nanoseconds" to predictive models for IPO demand and deal timing ("day finders").
• Mark Machen's firm is deploying "Thematic Investing" to navigate long-term disruptions in automobility, energy, and demographics, investing directly in autonomous vehicle startups like Aurora and Zoox.
• Technology is redefining the factors of production; the panel explicitly identifies "data" as the fourth factor, alongside labor, capital, and land, driving both value creation and government risk.

ESG and Investment Performance

• Panelists note the lack of consensus in ESG ratings, citing Tesla as a polarized example where different providers place the company at the top or bottom of the spectrum.
• Joe Atanasio reports using proprietary ESG data to successfully identify credit risks (e.g., avoiding a US herbal extract firm due to worker safety issues) and find opportunities (e.g., a Chinese pet food supply chain).
• Mark Machen presents proprietary research showing a positive correlation between gender diversity on boards and long-term value creation, based on an analysis of 3,800 securities.

Final Risk Assessments and Recommendations

• Biggest Risk: Panelists identified the US dollar strength, isolationism, energy price volatility, low interest rate mispricing, and the US wage-stock divergence as primary concerns; Sir Michael singled out a pandemic as a potential GDP-destroying event.
• Best Asset Class (1-Year): Joe Atanasio expects distressed debt; Mark Machen anticipates opportunities in downgraded triple-B minus bonds; Michael favors structured credit; Elif prefers public equities due to low rates.
• Best Asset Class (10-Year): Mark Machen projects private equity will outperform over the next decade due to long-duration capital needs.
• Key Literature: Suggestions included Twitter (Joe), Waiting for Godot (Michael), World Order by Henry Kissinger (Elif), AI Superpowers (Elif), and Sapiens (Mark).