Conference Presentation, Panel
Macroeconomic Outlook: The Search for Value
Milken InstituteJoseph L. Hooley, Afsaneh Beschloss, Bjarne Graven Larsen, Joshua Harris, Hamilton "Tony" James
- Global recovery is projected to remain sustained yet muted and weak by historical standards, with the US continuing to recover amidst stagnant GDP, declining unemployment, and improving inflation, while the Fed reduces accommodation.
- Growth trends are expected to continue upward for the Eurozone with low inflation, improve similarly in the UK, and lift Japan out of a long decline, while emerging markets stabilize compared to prior fears, with India performing well and Brazil and Russia recovering from a 2016 trough.
- Over the next decade, emerging markets are anticipated to achieve 4% to 6% growth rates compared to 1.5% to 2.5% in developed markets, driven by the fact that over 75% of future GDP growth is expected to occur in emerging markets broadly defined.
- Geopolitical risks are expected to intensify regarding the South China Sea, North Korea, the Middle East, and Russia, with potential relief anticipated from resolving North Korea tensions.
- Asset owners are predicted to lower return expectations and potentially assume more portfolio risk, with emerging market health and IT sectors expected to remain major growth drivers for the next 10 years.
- Private credit is viewed as an attractive investment area in the US, particularly for aviation and real estate, with opportunities to generate 100 to 500 basis points of arbitrage over the curve while US banks remain comfortable with regulation but do not expect to return as primary credit extenders.
- Global net securities issuance is projected to be negative $600 billion annually due to central banks purchasing over $6 trillion, creating an environment where publicly traded securities with QSIP remain overvalued and equity rates continue to drive prices in an eighth-year expansion.
- Value opportunities are identified in public markets for companies missing earnings or facing disintermediation threats, the US banking sector due to large asset volumes, and European banks trading at 0.5 to 0.6 times book value due to regulatory pressure to downsize.
- Non-securities such as real estate, mineral rights, spectrum, and leases are expected to remain undervalued due to market inefficiencies, with illiquid assets possessing a real moat projected to compound at 12% over 25 years.
- Portfolio construction is expected to focus on risk-based diversification across scenarios rather than rate forecasting, with allocation shifting from passive liquid markets toward illiquid assets and infrastructure as search for yield continues despite expensive valuations.
- Global rates are expected to rise eventually, though timing is uncertain and a fundamental rise may be delayed, potentially requiring a long wait; floating rate debt products could yield 8% with senior secured backing if rates increase, while equity dividend yields are expected to stay near the 10-year Treasury yield.
- Infrastructure investment is projected to face regulatory hurdles in the US requiring approval time reductions to two years, while emerging markets are expected to host 42 of 50 mega-cities in the next decade, creating significant demand for specific real estate types.
- Infrastructure in emerging markets is forecast to be the highest performing asset class for Ontario Teachers' with annual compounded returns of 47%, while China and India are expected to invest $100 billion and $10 billion annually respectively in cleaner energy.
- The US healthcare sector in emerging markets is expected to double from 2% to 4% of total EMSCI, remaining below developed market levels, while corporate securities in these regions require hard assets or dollar-based revenue streams to mitigate volatility.
- Operational in-house skills and strategic partnerships are expected to grow for Ontario Teachers' rather than reducing external manager allocation, and US bank regulation is anticipated to become more impartial, though the regulatory architecture remains.
- Real estate is expected to remain a robust business where assets are bought below replacement cost with low loss rates, while office space per employee continues a 40% decline over 35 years driven by the gig economy and remote work.
- Urbanization and e-commerce last-mile distribution are identified as megatrends driving real estate demand, and states are expected to sell state-owned assets to the private sector to unlock 25% extra federal funding for infrastructure redeployment.