Howard Marks “China has had too much lending, too much fixed investment and empty buildings”

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Published on Nov 1, 2015

Published on Nov 1, 2015

Oaktree Capital Management has been following a mantra of “move forward, but with caution,” since 2011, and Howard Marks, the firm’s chairman, told AVCJ earlier this year that he has seen no reason to change this outlook.

“I haven’t thought that the outlook is so bad or prices so high that we can’t make or hold investments, but I also thought that it was extremely important to be cautious, careful and conservative in this environment. There is substantial risk-taking going on by other market participants and this means we must be careful about what risks we take.”

His concerns about the amount of liquidity in the market and the levels of risk aversion have remained consistent over the last 12 months – “We are in a funny environment where no one is that bullish in their outlook but they’ve had to act bullish in order to make a decent return in a low return environment” – and even a much-anticipated increase in US interest rates should not alter the status quo enormously.

“It really depends on what you mean by an increase – is it one basis point or 300 basis points? I continue to believe that the Federal Reserve and other central banks will be extremely cautious in applying a rate increase,” Marks says. “The last thing they want to do is jeopardize this unsteady, unpowerful recovery.”

The Chinese central bank and other financial institutions also play a key role in the development of that country’s economy. Intermittent, and short-term, policy changes aside, the general approach has been one of stimulating rapid growth, with fixed-asset investment one of the driving forces. However, investors are now questioning the market outlook for China as it transitions to a different kind of growth.

“As happens in any market when you have hyper-accommodative central bank and financial institutions, they push money at real estate developers and if you give them money they are going to build. They may build without asking who is going to occupy those buildings. So China has had too much lending, too much fixed investment and has empty buildings,” Marks says. “It has stimulated an already growing economy to the point where I guess it was not sustainable.”

In his view, both the boom and the subsequent slowdown are exaggerated, in part because “investors swing to extremes and the truth is usually somewhere in between.”

This points to a broader global trend whereby investors repeatedly make the same mistakes, albeit with subtle but often significant differences in the detail. “Mark Twain is reputed to have said history does not repeat, but it does rhyme,” Marks says. “The details and the timing change but the themes of first being too pessimistic and then being too optimistic and then being too pessimistic, this will never change. And it is going on again now.”

He does, however, note two key differences from the pre-global financial crisis period. First, there is no 2015 analogy to the structured mortgage-backed securities and all the leverage present in them. Second, people are no longer blind to the possibility of failure.

“In 2005-2007, nobody thought anything could ever go wrong,” Marks says. “More recently a lot of people have been asking me, ‘What do you think is going to go wrong?’ They know something is going to go wrong, they just can’t figure out what it’s going to be.”

Howard Marks will be making a keynote address at the AVCJ Forum in Hong Kong, which runs from November 3-5. For more information, please go to

Howard Marks
Howard Marks

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