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Investors should be playing defence, advises US investor Howard Marks
DESPITE recent volatility, there is not much distress yet in the financial market, celebrity American investor Howard Marks has said.
“Most of the quantitative evidence is modest - not optimistic, but not too bad,” he said. “My general position is that when people are accepting a lot of risk and feeling good about risk, that makes the market a risky place and we should apply caution.”
Mr Marks, the Los Angeles-based co-chairman of Oaktree Capital Management with a reputation for being a bargain hunter, was in town for the Bank of Singapore's Global Outlook 2019 forum on Monday afternoon.
“Things are beginning to go the way of the distressed investor or the value investor; things are not as expensive as they were six months ago,” he told some 1,200 attendees - mostly Bank of Singapore clients - while citing factors such as the impact of rising interest rates on investors' risk tolerance and company debt. “But there's not much distress there yet.”
Mr Marks noted that “with interest rates extremely low for the last 10 years, people have had to take on increasing risk in order to access the kinds of returns that they wanted”.
Still, optimism has not been too high, he said. “There have been pockets of optimism - the FAANG stocks, some EM (emerging market) debt from time to time, and certainly Bitcoin, were all indicative of the presence of optimism in the market - but I don’t think to a great extent.” The term "FAANG" refers to popular American technology counters Facebook, Apple, Amazon, Netflix and Google parent Alphabet.
Mr Marks acknowledged that investors should be asking themselves what their stance is on risk. “My answer - pretty strongly held, although not dramatically so - is that you should be more defensive than usual, not more aggressive,” he added. “We should worry more about losing money than about not missing out.”
While risk levels might have been elevated about half a year ago, “you could argue that the correction of the fourth quarter let a little steam off . . . and has permitted things to re-stabilise and smooth out”, he said. “I think it’s better to invest today than it was on Oct 1. I still think that there is optimism in market prices. I still think that we are late in the economic cycle, approaching the tail-end of a long bull market.”
He added, to a question on whether the global growth cycle could have chugged on for longer, if not for US President Donald Trump's hawkish attitude towards trade with China: “I think that the trade war and the adverse market to it was only one of the factors that contributed to the fourth-quarter downturn. Things had gone so well for so long, we were getting good for a downturn.”
Mr Marks also said: “It can be argued that we are in the bold, innovative, early part of the cycle. The question is how close we are to the silly, imitative part.”
As for the United States Federal Reserve's possible interest rate policy in 2019, he predicted: "When there’s too much money chasing deals, then it’s hard to get a good deal. Prices are bid up and risks are elevated and structure is weakened by the onslaught of capital.
"We have been watching, over the last couple of years, as the Fed has tried to rein that in by raising the cost of capital. There may be a hiatus in that.
"Still, I think, the interest rates are biased towards the upside and will be going higher. It makes life tougher for debtors and creates investment opportunities away from the stock market.
"My own bias is that rates will not rise as rapidly in the next two years as they did in the last two, but, in general, they will continue to rise."