Howard Marks, the legendary credit investor and co-founder of Oaktree Capital Management, has historically taken a humble approach to investing, focusing on small-picture details where he can gain an informational advantage. However, Marks recently made bold predictions about the slowing or reversal of globalization and its impact on inflation and interest rates. While some criticize Marks for contradicting his own philosophy, others appreciate his nuanced perspective.
Marks' recent comments align with his belief that governments cannot sustainably support the economy indefinitely. He warns that the level of public indebtedness resulting from government efforts to support the US economy during the Global Financial Crisis and the Covid-19 pandemic could prove unsustainable. Marks believes that higher interest rates and slower economic growth will test the boom in private credit. He views corporate balance sheets as generally less leveraged compared to public debt and expects future returns for fixed-income investors to be higher than the low-interest rate period of the 2010s.
On the other hand, Bill Ackman believes that inflation may be permanently higher due to structural changes in the global economy. Both Marks and Ackman acknowledge the uncertainty surrounding interest rates and offer different investment implications. Marks suggests that credit markets may be among the biggest beneficiaries, while Ackman projects persistently higher inflation and policy rates. The interest rate environment is in an unusual place, and the range of possible outcomes is wide. While extreme scenarios are unlikely, investing in credit at current yields may be a better strategy as the future unfolds.
Karen Ward, Chief Investment Strategist of J.P. Morgan Asset Management, shares her perspective on investment strategy and interest rates. Ward believes that political considerations should not have a decisive say in investment strategy. She expects interest rates to be moderately cut in the summer but remain higher compared to pre-pandemic levels. Ward highlights the resilience of the US economy and the importance of fiscal policy in driving growth. She disagrees with the notion that zero interest rates are good for asset prices, stating that they represent an ill economy. Ward sees opportunities in European stocks, which have low expectations due to the cost shock experienced by the region. She also believes that commercial real estate remains a critical building block for a diversified portfolio and expects it to perform well in a moderately higher inflation environment. Ward cautions against placing too much weight on politics when setting up an investment strategy, as politicians' promises may not align with actual policy outcomes. The biggest risk to investment strategy is if the expectation of inflation being behind us turns out to be false. Ward has been the Chief Market Strategist EMEA at J.P. Morgan Asset Management since 2017 and has a background in economics.
The contrasting views of Marks and Ward provide investors with different perspectives on the investment outlook, interest rates, and government debt. While Marks warns about the sustainability of government support and predicts higher interest rates, Ward emphasizes the resilience of the US economy and expects moderately lower interest rates. Both acknowledge the uncertainty surrounding interest rates and offer different investment implications. Marks suggests credit markets may benefit, while Ward sees opportunities in European stocks and commercial real estate. The range of possible outcomes is wide, and investors may need to consider these divergent views as they navigate the investment landscape.
According to a recent article by NBC New York, Howard Marks believes that the Federal Reserve will not bring interest rates back down to their post-financial crisis lows. Marks argues that doing so would be unnecessary stimulus for a strong-performing economy and that ultra-low rates had negative impacts on market behavior. He suggests that interest rates should be set by the free market rather than by a central bank. Marks also states that the current environment and future outlook mean that investors should be adding credit into their portfolios. He highlights the advantages of investing in sub-investment-grade credit instruments, which can provide returns that approach or exceed the historic average return on equities. Marks' own firm, Oaktree Capital Management, specializes in investments in distressed securities [6036cd91].