Still with us our Christina Hooper of Invesco and Bloomberg's Tracy Alloway
Tracy Alloway to pick on you from here on the debt side borrowing money at
double digit numbers we're not there at this point now but at the same time what
is this enviro we just described going to do for the asset of fixed income.
Yeah. You know we're talking about financial
conditions earlier. And I think one of the weird things
about recent market moves in history has been how sanguine the credit markets
have been about inflation and higher interest rates.
And I've seen various theories. You know today we actually finally saw
leverage loans. The benchmark index down to like ninety
three dollars. But even then eighty five is generally
considered the distressed level. So what's going on.
One theory I've seen and you know it's kind of a sort of moral hazard argument
but there are people who say because the Fed came in last time with the corporate
bond purchasing program maybe that's one reason we haven't seen the market panic
because they think if things get bad enough while the Fed will come in and
it'll buy some bonds. Well last time it didn't even have to
buy bonds. It just announces that it's going to buy
bonds and everything is fine. But I think people are looking for that
pressure and you are starting to see some signs of it around the edges.
So for instance we saw triple C rated junk bonds today.
Take a little bit of a hit but not nearly what you would have assumed.
Looking at stocks. So what's your reaction to that
Christine. Is any form of fixed income right now
sort of a haven in this very tumultuous time in the markets.
Yeah I mean first I have to say it all depends on your time horizon but.
And so I believe very strongly that it's important if you've got a long time
horizon you shouldn't panic in this environment.
I mean let's look at fixed income floating rate but there's a variety of
areas. Investment grade credit looks good.
I think we just have to recognize that we're going through this adjustment
period. We're going back to the old normal.
Presumably if the Fed doesn't cut rates again.
Right. And that was a time that was fairly good
for for equities and fixed income. I think it's important to have Alton
there too but it is not the end of the world as we talked about before.
It's just we're going through a change when we're talking about fixed income
whether it's loans or bonds. We had one story this week Citrix where
they basically were borrowing a lot of money and the banks went out and
indicated that they would be just fine. They ended up losing something like 600
million dollars in the deal. They had to eat that money.
What happened there. Is that a one off or does that say
something broader. Well to me this is sort of the tail end
of that buyout boom and a lot of the credit market excesses that you've seen
in recent years. And one reason why leverage loans in
particular are getting so much focus right now is because if you look at
which asset classes had the most to say enthusiasm leverage loans would be one
of them. You know we had concerns about the
quality of some of those loans for a while.
We had at various points in time U.S. regulators trying to improve the quality
of the market. And now as interest rates get higher a
lot of that pressure lands on floating rate loans because the companies that
took them out are going to have to start paying more to keep up with those
benchmark interest rates. And that's why you have people who are
well at Morgan Stanley for instance who are looking at the leveraged loan market
as the sort of canary in the coal mine of how the market is viewing recession
risk. But again we're not quite there.
Eighty five is usually the level of distress.
We are at something like 93 now. So further to go if you're really
looking for a sign that the market is panicking Christine if that's a fixed
income what about equities. Does it make any sense to buy equities.
Typically when the discount rate goes up equities go down.
And certainly we're seeing that right now in the equity markets.
Sure. Well I do absolutely believe that unless
you have a three or four month time horizon you should be keeping your
equity exposure and looking for opportunities to add to it.
Yes there is that adjustment period when when rates go up we do see equities tend
to go down. But we also tend to see a recovery.
It doesn't last forever. In fact during a whole Fed rate hike
cycle usually by the end we come up with positive performance for equities and
leading the way is typically the higher valuation names that got hit hardest
first. So this is you know this is to be
expected. It's not fun but it is to be expected
the kind of behavior we're seeing given the kind of dramatic increase in rates.
But that is not the end for equities. You might actually add at least
selectively to growth right now. Absolutely.
So is it coming out of it faster than the others you think.
I do. I do believe that for sure.
Valuations are higher there. They tend to get hit hard.
But but they're also significant growth prospects growth potential there at a
time when the economy is clearly slowing down.
So Tracy what do you see in other asset classes.
And let me name two random cash. Commodity.
Cash. I mean cash is looking okay.
Right now I guess you're only losing 8 percent per year versus what like 20
percent on some other stuff. But when we're talking about cash I mean
it's gotta be in the dollar. That's the only thing that's really
working at the moment. Cash.
We used to say cash is king. Now we say the dollar is king.
And not only is the dollar king it is a king with a wrecking ball going through
other asset classes. Before you said the very fact that the
dollar goes up makes commodities go down in general over time.
And so that means commodities aren't so attractive to investors right now.
Oh that's exactly right. And I think that's one reason why the
recent environment has been so painful for a lot of people because think back
to the beginning of the year. Commodities were seen as this inflation
hedge a bit of a risk off hedge. You know if you're worried about what's
going on with Russia and the Ukraine you can buy some wheat exposure buy some oil
exposure. You have a nice little offset to macro
risk that shows up in the sort of headline indices that's not working
anymore. And I think that's one reason why the
environment's been so difficult for investors.
The only good news that I kind of see here is you know people have been having
to deal with these really binary potential outcomes for most of this
summer. You know does inflation stay high.
Do we get the dreaded wage price spiral or does the Fed come in and raise
interest rates bring down inflation and you get that knock on recession effect.
I think the good news here is we're moving away from that really binary tale
risky environment and we seem to be moving closer to that recession
scenario. I know I'm scraping the bottom of the
barrel by saying recession is good for investors at this point in time but at
least you know where you're headed. Well that's all we're looking for though
is where my investments go north actually in this difficult time
Christine. What we haven't covered is always
alternative investments real estate things like that.
We need to have exposure there. We advocate something akin to a 50 30 20
allocation and that would include in that 20 percent plus bucket a nice
healthy exposure to real estate real estate income.
Know clearly the more conservative real estate makes more sense in this
environment. I think there's a lot of concern that
there's so much structural change going on that that office space for example
you can't trust can't rely on in this environment.
But there are a lot of areas that are not part of the economic cycle that
haven't been hurt by the changes we've seen in terms of hybrid working
self-storage student housing. They're all kinds of areas that are very
attractive right now in real estate sectors.
I'm sorry. Go ahead.
I was going to say I think offices might be a good hedge at the moment because if
you think about you know the emanate boom kind of dying all the eminent
bankers now get called back into the office because Goldman says business is
slowing down or Barclay's says business is slowing down.
You all have to come back. Rents go up.
I'm joking. Of course
we're trying to be creative with the portfolio hedges.
Last thought from your podcast you cover an awful lot of aspects of financial
ISE. What's the most controversial suggestion
you've heard made about investment. What's the one that's just out there.
I'm trying to think I'd hurt. I don't think this is the most out there
but it's sort of a contrarian position that's on my mind.
And it's the idea that everyone's looking for the war between Russia and
Ukraine to come to some sort of end. What if it doesn't.
What if we just get a sort of Stacy's scenario where Russia occupies some
parts of Ukraine and that's the end of it.
And the market seems to be looking for a sort of finite ending and I'm not sure
we're gonna get it.