CQS Midyear 2017 insights from Sir Michael Hintze

Sir Michael Hintze – Key points from  H1 letter below.

– he is constructive on equity and credit markets – believes they will edge higher

– always mindful of ‘pot holes’ however doesn’t see any ‘black holes’

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- believes interest rates must rise

- expects US monetary base to shrink modestly over next two years

- asset purchases by global central banks in total  set to continue & fiscal stimulus set to expand [US and China]

- gorilla in room is USD

- while markets at upper end of valuation ranges there is dispersion and idiosyncratic opportunity in corporate credit

- believe active management strategies will fare better going forward than have over past few years

- asset management industry facing paradigm shift

- been adding to credit exposure and prefer short-to-medium term

- doesn’t see any near-term catalysts that would meaningfully widen credit spreads

- moderate global economic growth and low default rates is positive for credit

- prefer US over Euro loans due to all-in yield

- convertibles are attractive due to convexity of return profiles and low equity volatility creating strong opportunities to enter convertible arb

- high yield getting very interesting again

- sees oil at $35-$55 range still

- ability for OPEC and non-OPEC to cut oil prices for longer period limited by fiscal needs particularly Saudi/Russia

- given view on oil think premature to seize the energy opportunity

- cautious European high yield given how tight spreads are

- equity market liquidity still relatively high but sense interference from HFT/algos

- dealer balance sheets contracted sharply in fixed income markets

- risk free rate low in US and negative in Europe - there is risk to risk free rate – be in short/floating rate securities

- corporates financials, cash flows continue to improve in US and EU high yield credit

 

- sees China’s Belt and Road initiative [BRI]  as under-appreciated in its ambition – ‘a turbo charged 21st Century Silk Road’

- BRI is ‘an underappreciated fiscal stimulus to growth in China and the surrounding economic region that can mitigate tightening within China due to slower credit creation

- Remains constructive on China but need to be vigilant

- worthwhile remembering China’s ability to implement long-term policies – they have effectively 10 year electoral cycle vs 2 in US

- Euro/global populism/chaos in middle east/failed US politics – “None of the have affected markets, yet: but with each layer of complexity comes fragility which could in time have significant implications”

Monitoring following:  US Chinese co-operation seems critical to tackling problem that is nuclear North Korea, US debt ceiling must be addressed by mid-October

What could go wrong:

- Serious slowdown in China

- Sharp loss of consumer confidence and economic decline

- Higher default rates

- Stagflation

- Geopolitical shocks, especially North Korea or Oil

- Loss of confidence in central bankers

- liquidity inspired decline in asset prices due to ETF’s

 

Not an exhaustive list and he remains vigilant

See the full letter from  Sir Michael Hintze below

CQS_Insights_Mid-Year_Review_2017