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
