European Investment opportunities 0 Are there any investment opportunities in Europe? Many questions loom large after Britain’s shambolic exit from the EU, almost all of them are unresolved. What’s more, the continent is dealing with what seems to be a continual banking crisis and the UK’s exit has ignited talk of independence in several other states.
At the IMN’s 22nd Annual Alpha Hedge West Conference, a group of leading hedge fund figures gathered to debate the region’s future and look for diamonds among the rubble of Europe’s investment landscape.
As part of a roundtable focused on the topic “Are There Any Investment Opportunities in Europe?” Stuart Fiertz, Co-Founder and President, Cheyne Capital Management and Bruce Richards, Co-Managing Partner and CEO, Marathon Asset Management discussed what course they believe the region will now take and where investment opportunities exist in Europe today.
European Investment opportunities – Are there any?
The uncertainty that Brexit has brought to the table is the most unnerving development investors face today when investing in Europe. Unless they have specifically avoided the region, most European investors will have exposure to the UK in their portfolios, and after Brexit, the country’s economic outlook is now plagued with uncertainty.
[drizzle]However, Stuart Fiertz believes that the UK can go it alone with relatively little turbulence. At the conference, he declared that UK unlikely to go into recession, optimistic that other countries such as India and China will be able to adjust to the new regime and do trade deals with the UK just like they did with EU. The investability of Britain remains high.
It’s fair to say that Bruce Richards isn’t so optimistic. He replied to Fiertz’s positive statement by cautioning that the UK will fall into a recession closer to when they actually leave the stability of the banking system in Europe. Up until this point, the country many be able to fool outsiders that it can stand on its own two feet. Political risk is the biggest problem facing the country up until this point.
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Both panelists went on to agree that the one positive Europe and the UK have going for them is the flat yield curve. Marathon Asset Management has analysts on the ground monitoring the banking situation in Europe and Richards reports that few of these analysts are worried about what they see. In Italy for example, Marathon is (along with other asset managers) buying/understanding/sourcing NPLs from banks directly and there is what Richards calls, “tremendous liquidity” in the system and as a result “no bank will fail.”
Fiertz sees opportunity in real estate loans where banks pulled back faster than they did on corporate loans. Richards agrees he compares the state of the European real estate loan market to that of the UK, which is much more competitive due to higher rates:
“With NPLs, there was a big UK bank, they got the NPL, foreclosed and owned real estate shopping centers; it was fixed financing – Euribor is negative and cap rate provides wider spread than what would be found in US.”
Fiertz agrees. Even corporate loans are not as attractive as European real estate loans as the ECB has pumped in enough money to help corporates and lower interest rates to unattractive levels.
European Investment opportunities – look to the credit space
“Credit Investing In A Time Of Negative Yield” was another topic put to panelists at the IMN’s 22nd Annual Alpha Hedge West Conference. This panel, chaired by Amit Thanki, Investment Officer, San Bernardino County Employees’ Retirement Association discussed investment opportunities for today’s yield starved credit investors. Panelists included: Lawrence Post, Partner, Arena Capital Advisors; Casey Wamsley, Director, Collins Capital Investments; Ross Revenaugh, MD, Echelon; Mark Okada, Highland Capital; Richard de Silva, Lateral Investment; Michael Secondo, SVP, US Bancorp Fund Services, LLC.
Casey Wamsley made one of the most convincing cases for buying credit over equities during his speech. He made the point that over the next few years, equities are only likely to produce a return of 3% to 5% per annum, and therefore, high-yield credit offering a return of 5% or more per annum will generate a higher return for investors. Based on this assumption, Wamsley’s Collins Capital Investments is rotating out of long/short equities into the high-yield space. One great trade was 10-month Sprint paper in December 2015 yielding 8%. Also seeing int’l capital flooding into muni markets.
Ross Revenaugh and Richard de Silva made the point that P2P and private credit offers a better return that high-yield due to the illiquidity premium. The marketplace or P2P lending industry is a $20 billion space and yields average 10% to 12% over an 18-month duration. It’s not a new asset class; it’s unsecured consumer credit. Only the sourcing mechanism has changed (Lending Club, etc.) As banks pull back from the private credit space, this asset class will attract more investors. Mark Okada agrees noting that banks have been disrupted by new regulations yet companies still need credit; banking system is handicapped in providing credit. Alternative credit space will be providers of this credit.
Michael Secondo provided evidence to show that this trend is already happening. As US Bancorp Fund Services is a prime broker for hedge funds, the unit has some idea of what hedge funds are doing with investor cash. Secondo reports that around 60% of assets under management at the hedge funds working with his firm are devoted to credit strategies.
Lawrence Post is more skeptical when it comes to credit. Unlike his peers on the panel, Post believes that negative rates in the AAA prime space present a risk to investors while there is little in the way of value left in the high-yield space. Ex. energy the default rate in high-yield is 0.5%, dangerously low.
Nonetheless, one thing the everyone on the panel agrees with is that why the sell-off eventually arrives, it will present some tremendous opportunities. Wamsley believes rates will be higher in two to three years; larger managers may be in for rude awakening where smaller managers are more nimble. Okada disagrees on recession but notes that liquid alts where beta chasing has been occurring, will mean revert in the near-term as returns stagnate, presenting opportunities to generate alpha. He goes on to say that forced selling is a great trade, you can lock in 16-18% yields as ETFs rush to exit the sector. Post agrees and says that at times when high-yield ETFs have been in the market to sell you can buy bonds three to four points down.
European Investment opportunities – what