Panel, Conference Presentation
Global Capital Markets 2019
Milken InstituteAlison Mass, Mark Attanasio, Elif Bilgi Zapparoli, Sir Michael Hintze, Mark Machin, Joseph Naggar
- Populist voting shares are rising globally, creating a policy vacuum and dilemma that China may exploit to increase its effectiveness, though the speaker identifies isolationism as the primary risk to the global economy and highlights the potential for a pandemic to cause significant GDP destruction similar to the SARS event.
- China's GDP is projected to reach 20% of the global total by 2025 and could approach 25% by the mid-2030s if growth trends linearly, despite workforce peaks and a population decline expected within the next decade; however, short-term risks include capital starvation due to shadow banking clampdowns, while medium-term risks involve trade tensions and potential 25% tariffs that could severely impact global markets.
- Foreign ownership of Chinese A-shares stands at 2.6% compared to higher levels in developed markets like Korea and Japan, with restrictions on foreign ownership in securities, asset management, and life insurance set to be abolished over the next three years and automotive sector restrictions lifted over the next couple of years, alongside expectations that China will run a current account deficit to support its reserve currency ambitions.
- US equity valuations have shifted from the 90th percentile peak in 2018 to the 74th percentile currently, while the number of listed US companies has halved since 1997 and taxpayer participation has declined over 20 years; conversely, private capital has risen inexorably, comprising 65% of some portfolios, though valuations are stretched and public markets are expected to be the best performing asset class one year from now due to low interest rates.
- The leveraged loan market faces increased volatility and will require active management rather than passive approaches, with 80% of active managers currently beating passive indexes in the high-yield bond market; the speaker anticipates credit and structured credit will be the best performing asset class over a two-to-three-year cycle and private equity over the next five to ten years.
- Passive investment strategies have distorted bond market valuations and increased volatility, creating opportunities for active managers in emerging markets and distressed products, while technological advancements are accelerating trade execution speeds to a million trades in a nanosecond and driving an "uberization" of financial services through AI and data analytics.
- Thematic investing groups are targeting long-term trends such as data analytics, automobility, and climate change, with a constructive outlook on autonomous vehicles likely providing a slight long-term positive for toll roads but a negative for parking; however, real assets like real estate and infrastructure are highly competed with limited opportunities, and ESG data requires proprietary databases to generate alpha despite a positive correlation between gender diversity and value creation.
- The US dollar is viewed as a significant risk to global economic health due to its 9% rise in the last year and internal disparities where global purchasing power parity exceeds US-dollar value by $45 trillion, while low interest rates facilitate the mispricing of risk with nearly a trillion dollars of triple-B-minus bonds facing potential downgrades into distressed categories.
- Market indices for China currently include a small portion of the market that will gradually increase, offering opportunities for excess alpha due to inefficiencies in equity and bond markets, and investors are increasingly viewing China as an uncorrelated diversification source, while central banks are expected to support growth environments for at least another year into 2019.
- Private assets are nascent regarding governance and disclosure compared to public markets, with venture-backed firms staying private for nine years compared to five in the 1990s, and a downturn is expected to stretch private asset valuations while creating simultaneous liquidity needs; the speaker remains constructive on markets for the next five years but notes that risk models could fail quickly during a downturn.