In this Q&A, Sir Michael Hintze, Chief Executive and Senior Investment Officer of CQS, presents an update on the risks and opportunities he sees in markets in 2017 and beyond. The fund was up 30% in 2016 according to sources familiar with the matter.
Key Points from Michael Hintze…
“The bigger macro focus in 2017 and 2018 will be global inflation which is expected to rise from 1.5% in early 2016 towards 2.5% by early 2018.”
“In the US, further QE is over for now and it seems to me that the appetite for QE is waning in the UK, although the Eurozone, China and Japan continue to run accommodative monetary policies. I want to emphasise that I do not expect the liquidity pumped into markets by unconventional monetary policies to be drained, which should be supportive for markets”
“Early signs are promising, but Mr Trump has always been an outsider. He had minimal support from the Republican Party and has a minimal obligation to them. He appears to
me to be his own man and it seems to me he will delegate a lot. All this suggests that there will be market uncertainty and volatility about fiscal, political and trade policies which I believe will be good for active managers.”
“I believe markets will trend upwards because of the Trump-driven stimulus from fiscal and tax policies. The opportunity for ‘air pockets’ is high and they could appear scary, but given the liquidity in the system I do not subscribe to the view that markets will see a collapse”
“There has been substantial sector rotation and in some of the major equity markets, the hunt for yield is yesterday’s story and cyclicals are back in favour.”
“Fiscal stimulus and tax cuts in the US should be positive for business. The US dollar has rallied and I expect it will continue to be stronger against most major currencies.”
“Commodities will see a two-way pull, but on balance it should be a positive environment for them.”
“More de-regulation than at any other time since Reagan’s Presidency is certainly on the agenda.”
“I believe both disintermediation and market volatility will continue to drive investment opportunity for managers like us.”
“Equity valuations look to me to be within historical ranges. There are sophisticated Equity Risk Premium models out there, but if you look at it more simplistically, the Equity Risk Premium for the S&P 500 Index is around 5.9% which is not at a level that concerns me. I think there is potential upside to markets as a result of the proposed lower corporate tax rate and the potential boost from repatriation of foreign cash held at many multinationals’ international subsidiaries.”
“I believe the risk lies in the risk-free rate.”
“As always, there are numerous risks from protectionism to inflation expectations, geopolitics and the cyber threat.”
“The shift from unconventional monetary policies to fiscal stimulus will likely result in higher inflation expectations”
“Given the strength of the US economy, it is likely the inflation rate will rise further.”
“On geopolitics, populism will in my view continue to be a major theme into the future. On the heels of the Brexit vote, the US election and the Italian Referendum, there are important elections in the Netherlands, France and Germany in 2017.”
“I sense strong centrifugal forces stressing the EU and the Eurozone.”
“The Gulf States are facing fiscal as well as security challenges, compounded by low oil prices, and the uncertainty of how President (as opposed to candidate) Trump will deal with Iran.”
“One of the things that is clear to me from the recent OPEC deal is that the ‘swing producer’ is the US and no longer Saudi Arabia.”
“The world is always complex, but the nature of the current geopolitical environment has the potential to affect trade and markets in more ways than I can ever recall.”
“The biggest challenge in today’s world is that knowledge has increasingly become a commodity. How do you find that kernel of information, that anomaly that enables you to generate alpha? When I began in the business, a Quotron provided market quotes on screen as opposed to the ‘tape’ and enabled the aggregation of portfolios. These were advantages. Bloomberg has very deep analytical tools available. Today most people have a smartphone and can access masses of information and analysis. The key is to be able to place knowledge in context and to have imagination and judgement to gain insight. Clearly, you then need to construct an investment, trade it and then risk manage it.”
“To trade well, you need to understand the fundamentals, the technicals and the market segment you are investing in. At CQS, we have worked hard to put in place a disciplined investment process centred on fundamental analysis.”
“Seldom does a model give you the answer, but it can provide the context”
“We have a disciplined, repeatable and adaptive investment approach that seeks to create optionality and convexity in client portfolios.”
We’ve seen a dramatic change to market perceptions since Donald Trump won the US election. Have your views of the macroeconomic backdrop altered?
Sir Michael Hintze: Change is occurring at a number of levels on the policy front. Monetary, fi scal, political and foreign policy, including trade and military, will be overhauled. The main difference is that US economic policy will shift from unconventional monetary policies to fi scal stimulus, although I do not believe the liquidity provided by unconventional monetary policies in the US will be withdrawn. In the short-term my view is the economy globally will continue to expand below trend, driven by below-consensus views about European and Chinese growth. The bigger macro focus in 2017 and 2018 will be global infl ation which is expected to rise from 1.5% in early 2016 towards 2.5% by early 20181. My view remains that the US expansion is on a steady footing and the Fed will raise rates, albeit progressively. While Europe’s growth is likely to be lower-than-consensus, Japan’s expansion is likely to remain muted and I am still of the view that China’s 6.5%-7% offi cial target for economic growth will be challenging to achieve over the longer-term2.
Do you think we’ve seen the end of QE?
Sir Michael Hintze: That depends where. Unconventional monetary policies provide liquidity, but it’s not clear to me they drive economic activity; liquidity will stay within the system, but I believe it has been relatively ineffective as a driver of GDP. In the US, further QE is over for now and it seems to me that the appetite for QE is waning in the UK, although the Eurozone, China and Japan continue to run accommodative monetary policies. I want to emphasise that I do not expect the liquidity pumped into markets by unconventional monetary policies to be drained, which should be supportive for markets.
Were you surprised by the result of the US election?
Sir Michael Hintze: I thought it was a very close call. It is certainly a change against the conventional wisdom and as we saw earlier this year in the UK the establishment is being challenged. I did have a very clear decision tree in my mind for both US electoral scenarios. Consequently, I felt comfortable buying the initial Trump ‘correction’. One of the key questions is how a Republican Senate and House will work with the Trump Presidency. We only know the identity of