Sir Michael Hintze, Chief Executive and Senior Investment Officer of CQS, recently expressed his thoughts on the global economy for 2014 in a CQS Insights report. Hintze does not anticipate any "black hole" economic events over the next 12 months, but rather a gradual improvement in the economies of most developed nations.
That said, Hintze argues there is a strong likelihood of a number of "pot holes" in the economic road in 2014, and that astute investors could position themselves to profit as these problems unfold in various areas. He specifically mentions the European periphery, the European parliamentary elections in May, Egypt, Syria/Iran or even a mismanagement of the looming Fed taper by an inexperienced Yellen as potential market-moving potholes to consider.
Michael Hintze's investment themes
The report suggests looking at the floating rate and short duration sectors of the credit market, including structured credit, asset backed securities and senior secured loans (especially European loans). According to Hintze, "Fundamental analysis will assist in capturing future dispersion given the current compression in credit spreads (especially in the US)."
Hintze also suggests looking at convertible bonds, particularly investor-friendly European convertible bonds, which he believes will benefit from improved levels corporate activity across the continent.
Last but not least, Hintze highlights the potential of selected European equities. He argues that an investor can take advantage by identifying firms whose assets are significantly mispriced.
Hintze ends the Investment Themes section of the report on a cautionary note. "It is clear to me that it is an advantage to be an active investment manager and that there are opportunities, but one must size positions appropriately."
Fed taper means the pendulum is swinging back
The report advances the argument that a gradual Fed taper over the next year or so is actually not that major an event for the U.S. or other developed economies, but it could be a bigger deal for emerging economies. Hintze elaborates, "I have heard it said that QE did more to stimulate downtown Mumbai than downtown Detroit. As Taper slows central bank balance sheet growth, the reverse could be true."
Although he does not think it is likely the Fed taper becomes a major economic stumbling block, Hintze also ends this section with a warning. "It is important to remember that the US dollar’s reserve currency status creates transmission risk globally and especially in developing markets."