At a conference focused on absolute return in Vienna, investors expressed fears that regulators may be ‘overshooting’ and discuss ways out of the low-interest-rate environment.
Positioning a portfolio today to bet either on a bullish or bearish view for the year to come is not smart, he told the fund selectors in Vienna. “Right now it is dangerous to make such a guess,” Blanschard warned.
Such a “battle of the forces”, as Blanschard put it, will make investing tough, and benefit strategies that focus on relative value. Weighing on sentiment and on the markets is the painfully high unemployment rate in the Western world and bank deleveraging.
These forces are fighting a duel with those for market stimulus, such as loosening monetary policy. The outcome for the global economy is hard to forecast and this uncertainty might be true for years to come. European banks still have a long way to go in terms of deleveraging, especially compared to their US counterparts (see chart). Given the ample evidence of both stimulus and depressants in the market, “volatility is almost certain to stay elevated,” said Blanschard.
“This asset class has attracted a lot of attention, given the volatile market conditions,” Wolfgang Alkier, CEO of ARC, said. Volatility was the focus of a presentation from JPMorgan, which focused on the use of a Macro Hedge Fund Index as a diversification tool.
Arbitrageurs were also found in the equity area. Laffitte Capital Management, a French asset manager, presented its event-driven strategies to selectors. Their outlook proved to be bullish for the cycle in mergers and acquisitions, given the considerable cash balances widely believed to be sitting on corporate balance sheets.
Aside from specific investment strategies, delegates were keen to debate opportunities in the current interest rate environment and the impact of the deleveraging cycle. Alex Veroude, head of credit markets at Insight Investment, a specialist asset manager responsible for assets of some €200bn, made a strong case for avoiding low interest rates by investing in credit markets. “Credit is as wide as it has been for years,” he said.
Even banks needed to be approached on a case-by-case basis. “Everybody hates banks, but not every bank is a bad bank”, Veroude said. Moreover, the present market conditions (with credit spreads for financial companies trading wider than those for corporates) will prove unsustainable.
Investment managers generally agreed that risk assets (such as financials, credit and equities in general) look cheap. But, as Blanschard cautioned: “Equities, bonds and commodities are all capable of delivering net returns in a range of minus 20% to plus 20%.”
Euro area and US bank loans and asset: