THE period of ultra-low interest rates is over, and what’s on the horizon is a prolonged period of lending, fixed-income investing and credit investing, said billionaire US investor Howard Marks.
“Credit is far more attractive today than it was five years ago in terms of return, whether it’s absolute return or risk-adjusted return,” said the 77-year-old at a recent investment forum with Oaktree Capital Management’s clients in Singapore.
Marks, the co-founder and co-chairman of the alternative investment firm, said the most important event in the financial world in recent decades was the 2,000-basis-point decline in interest rates between 1980 and 2020.
In late 2008, during the global financial crisis, the US Federal Reserve brought interest rates down to zero for the first time in an effort to save the US economy.
As this did not cause inflation to rise above the 2 per cent target, the era of low interest rates persisted, which led to the longest period of economic recovery in the US from 2009 to 2021.
Inflation in the US started to go up in 2021, partially due to the significant Covid-19 relief measures and supply chain disruptions caused by the pandemic. And from March 2022, the Fed entered its most rapid cycle of rate hikes in 40 years, putting an end to the loose monetary policy.
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Marks wrote in his latest investment memo that he has “found it hard to believe the Fed does not think it erred by sticking with ultra-low interest rates for so long”.
“We have not had a free market in money in roughly the last two decades,” he said.
The ultra-low interest rates meant it was much easier for businesses to secure financing. Even those that were losing money did not have much trouble getting loans, going public, and even avoiding defaults and bankruptcy.
According to Marks, this caused “investments to be made that otherwise would not have been made”.
The period of easy, cheap money also saw the rise of leveraged investment strategies, he said. The more leverage applied to a company or an investment, the larger the potential gains. The problem was, this approach also entailed the risk of amplified losses, he said.
“There will be a period in the future, sometime within the next 10 years, when the impact of leverage is (magnified losses),” Marks told The Business Times in an interview after the forum.
The period of magnified loss, however, presents opportunities for value investors whose goal is to always purchase things for less than they are worth.
Marks observed that when investors were making decent returns amid the accommodative monetary policy of 2009 to 2021, bargain-hunting was challenging as no one was willing to sell assets below their actual worth.
“(The hospitable environment) induced a lot of people to take their risk aversion to an unusually low level. And now, if negative things happen, we will see a swing toward risk aversion,” he said. “If you go from risk tolerance to risk aversion, it pulls prices down.”
He expects owners to unload securities as they get worried and become eager to exit at any price when economic events start to turn against them.
Bottom-up investor
With US$183 billion in assets under management, Oaktree positions itself as a bargain hunter with a value-oriented approach.
“We are excited about the period that lies ahead, whereas the (previous) 13-year period was quite dreary,” said Marks.
As a bottom-up investor, Marks avoids relying on macro forecasts to guide his decision-making.
He quoted American historian Daniel Boorstin that “the enemy of knowledge is not ignorance but the illusion of knowledge” and believes that “the future is not knowable”.
Marks expressed confidence that interest rates are “done going down”, and that the base interest rate over the next several years is more likely to average between 2 and 4 per cent, closer to the current levels, rather than the range of 0 to 2 per cent.
He also anticipates inflation stabilising at between 2 and 2.5 per cent within two years, and remaining at that level “for a while”.
Explaining these sentiments, Marks cited the slowing down or even a reversal of globalisation, which exerts an upward price pressure on consumer durables. He also pointed out the modest increase in the unionisation of the private sector in the US following a period of decline, adding that a stronger union presence would push up the prices of consumer goods.
Emerging markets as teenagers
Marks said he saw plenty of potential in emerging markets.
“If you look at developed nations like Japan and Europe, they are like economic senior citizens. You look at the US, it is a mature adult and still doing okay, but its best decades are behind it. You look at the emerging markets, these are teenagers – the best decades are ahead of them,” he said.
However, this also means that emerging markets are “volatile and tempestuous”, just like many teenagers.
Commenting on the risks in South-east Asia, Marks noted that there are numerous companies in the region that have borrowed in US dollars but do not have easy access to the greenback.
“You will have some bad days and weeks and months in the emerging markets, but if you have patience and the ability to hold through, some good things will happen,” he said.
Turning to China, Marks said that the country needs substantial gross domestic product (GDP) growth “to bring its people from the farms to the cities”. It does not have enough domestic demand to produce this GDP growth it requires and hence needs to sell to the rest of the world, he said.
Despite the geopolitical tensions, Marks said that Oaktree will continue to invest in China, as its current investments continue to yield good returns.
The company now holds 40 billion yuan (S$7.52 billion) across stocks, public and private debt, and real estate in the Greater China region and is seeking more opportunities in China’s loan market.
“I think (the US and China) will get along. I think we will be rivals rather than enemies,” said Marks.
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