Panel
Lessons From the Great Recovery: How to Maintain Investment Momentum
Milken InstituteScarlet Fu, Thomas Finke, William Ford, Jonathan Lavine, Emmanuel Roman, Steven Tananbaum, Steve Tannenbaum, Manny Roman, Bill Ford, Tom Fink
- U.S. interest rates are projected to rise slightly higher and accelerate further over the next six to nine months due to growth fundamentals and the unwinding of quantitative easing, which may trigger volatility spikes affecting Europe.
- Inflation is anticipated to accelerate within six months as the economy approaches a tipping point, potentially prompting rate hikes that increase risk premiums and alter the correlation between equities and fixed income.
- The current U.S. economic expansion is forecast to break duration records, potentially exceeding Australia's ten-year previous cycle, though market pricing assumes only five years of growth with little margin for error.
- Despite late-cycle characteristics, the cycle is viewed as mid-to-late due to technology-driven growth industries, while credit market defaults are not expected to rise materially in the near term despite exposure in disrupted sectors.
- Equity markets are considered fully valued with significant downside potential resembling a bull market end, prompting expectations for increased volatility necessary for a healthy cycle and potentially beneficial for IPOs.
- The IPO market is expected to enter an attractive phase in 2019 and 2020 with major listings including Airbnb, Uber, and Audion, driven by globalization and a long-cycle digital economy transition.
- China is projected to become the world's largest economy with a $20 trillion GDP by 2020, maintaining an annual growth trend of 5 to 7 percent, though trade negotiations introduce short-term volatility risks.
- Regulatory trends are expected to continue in big tech driven by European data privacy models, while U.S. elections could potentially pause or reverse deregulation if Democratic control is achieved.
- Asset management firms plan to increase investments in data, technology, and AI to gain market edges, though human judgment remains essential for areas like private lending where intangibles matter.
- The asset management industry faces short-term disruption from technology reducing fees, but expects long-term benefits, while a search for yield continues in U.S. direct lending despite less attractive conditions than previous cycles.
- Credit market conditions feature weak covenants, high loan percentages in capital structures (60% to 80%) leading to lower recovery rates, and a risk that the next downturn originates from unscrutinized financial corners rather than subprime mortgages.
- Liquidity risks persist in open-ended ETFs due to mismatches between asset liquidity and fund structures, while leveraged technology sectors are expected to face different recession recovery patterns than traditional asset-backed businesses.
- Investment opportunities are identified in illiquid markets focusing on logistics, Asia's expanding middle class, and Latin American local debt hedged into dollars, whereas European high yield is viewed as overvalued relative to U.S. Treasuries.
- The ECB is expected to exit bond-buying programs slowly due to unsustainable debt spreads in Italy and Spain, while market risk assessment is shifting toward treating issuers as at-fault until proven innocent during high-volatility periods.