This session examined the growing debt burden, borrowing from the future, and the impact on markets, the economy and asset class returns.[vc_quotes layout=”accordion” quotes=”%5B%7B%22name%22%3A%22Rich%20Randall%22%2C%22job_role%22%3A%22Global%20head%20of%20debt%2C%20IFM%20Investors%20(United%20States)%22%2C%22content%22%3A%22Rich%20Randall%20is%20responsible%20for%20the%20creation%20and%20management%20of%20IFM%20Investors%E2%80%99%20debt%20investments%20strategies%20and%20portfolios%2C%20and%20for%20the%20debt%20investments%20team%20globally.%20He%20also%20heads%20IFM%20Investors%E2%80%99%20North%20American%20debt%20investment%20business.%20Based%20in%20New%20York%2C%20he%20has%20more%20than%2020%20years%20of%20experience%20in%20originating%2C%20analysing%2C%20structuring%20and%20arranging%20debt%20facilities%20for%20large%20infrastructure%20projects.%20His%20experience%20includes%20fixed%20and%20floating%20rate%20debt%20instruments%20across%20a%20broad%20credit%20and%20industry%20spectrum%2C%20and%20he%20has%20a%20specialty%20in%20the%20US%20energy%20sector%2C%20which%20is%20the%20primary%20source%20of%20infrastructure%20debt%20issuance%20in%20North%20America.%20Randall%20joined%20IFM%20Investors%20after%2010%20years%20with%20RBS%2C%20where%20he%20was%20head%20of%20project%20finance%20in%20North%20America.%20He%20also%20managed%20and%20was%20responsible%20for%20the%20bank%E2%80%99s%20%243%20billion%20portfolio%20of%20infrastructure%20investments.%20Prior%20to%20RBS%2C%20he%20spent%20nine%20years%20with%20Credit%20Agricole%20(Credit%20Lyonnais)%20as%20a%20senior%20banker%20structuring%2C%20analysing%20and%20underwriting%20project%20finance%20debt.%22%2C%22image%22%3A%2244345%22%2C%22linkedin%22%3A%22https%3A%2F%2Fwww.linkedin.com%2Fin%2Frichard-randall-73576150%2F%22%7D%5D” title=”Speakers” el_class=””][vc_quotes layout=”accordion” quotes=”%5B%7B%22name%22%3A%22Colin%20Tate%20%22%2C%22job_role%22%3A%22Chief%20executive%2C%20Conexus%20Financial%20(Australia)%22%2C%22content%22%3A%22Tate%20has%20been%20an%20investment%20industry%20media%20publisher%20and%20conference%20producer%20since%201996.%20In%20his%20media%20career%2C%20Tate%20has%20launched%20and%20overseen%20dozens%20of%20print%20and%20electronic%20publications.%20He%20is%20the%20chief%20executive%20and%20major%20shareholder%20of%20Conexus%20Financial%2C%20which%20was%20formed%20in%202005%2C%20and%20is%20headquartered%20in%20Sydney%2C%20Australia.%20The%20company%20stages%20more%20than%2020%20conferences%20and%20events%20each%20year%20%E2%80%93%20in%20London%2C%20New%20York%2C%20San%20Francisco%2C%20Los%20Angeles%2C%20Amsterdam%2C%20Beijing%2C%20Sydney%20and%20Melbourne%20%E2%80%93%20and%20publishes%20five%20media%20brands%2C%20including%20the%20global%20website%20and%20strategy%20newsletter%20for%20global%20institutional%20investors%20conexust1f.flywheelstaging.com.%20One%20of%20the%20company%E2%80%99s%20signature%20events%20is%20the%20bi-annual%20Fiduciary%20Investors%20Symposium.%20Conexus%20Financial%E2%80%99s%20events%20aim%20to%20place%20the%20responsibilities%20of%20investors%20in%20wider%20societal%2C%20and%20political%20contexts%2C%20as%20well%20as%20promote%20the%20long-term%20stability%20of%20markets%20and%20sustainable%20retirement%20incomes.%20Tate%20served%20for%20seven%20years%20on%20the%20board%20of%20Australia%E2%80%99s%20most%20high%20profile%20homeless%20charity%2C%20The%20Wayside%20Chapel%3B%20and%20he%20has%20underwritten%20the%20welfare%20of%2060%2C000%20people%20in%2028%20villages%20throughout%20Uganda%20via%20The%20Hunger%20Project.%22%2C%22image%22%3A%2244341%22%2C%22linkedin%22%3A%22https%3A%2F%2Fwww.linkedin.com%2Fin%2Fcolin-tate-839a5a181%2F%3ForiginalSubdomain%3Dau%22%7D%5D” title=”Moderator” el_class=””][vc_empty_space height=”10px”]
Key takeaways
The unprecedented level of government debt signals sub-par economic growth ahead.
Debt involves borrowing from the future, and all studies show that countries that have high levels of debt have lower rates of GDP growth.
Government bonds are no longer a defensive asset: the downside risk of holding government bonds has increased and the negative correlation with equity reversed.
Investors have found opportunities in corporate debt in the wake of bank disintermediation since the GFC. Banks have ceded much of their lending in developed markets to the capital markets. However, private assets hold illiquidity risk as opposed to tradeable government bonds.
Companies that were hanging on before the pandemic and that got rescued will now face a reckoning. Service-type companies are over-leveraged, and airlines are also highly leveraged. Fallen angel opportunities exist as investment grade companies fall into the sub-investment grade market.
Debt capital provided by non-banks in US and Europe is developed, but in Asia only around 10 per cent of debt capital is provided by non-bank institutions.
Private corporate debt opportunities in emerging markets are limited because of the accompanying volatility. There is also a supply and demand imbalance given banks’ role in providing capital.
The big difference between the vaccine rollouts and the scale of the stimulus measures across the world could result in a K-shaped global economic recovery, with much of the developed world booming but poorer countries continuing to struggle. However the
Panellists discuss the possible impact of corporate failures on European banks coming out of the pandemic, and note central banks juggling act around digital currencies; unable to halt their arrival but still having to marshall progress and ensure the technology doesn’t weaken financial stability. The session examined the structural trends in the financial sector that have been entire amplified or altered by the COVID crisis.
Bridgewater’s co-CIO Bob Prince explains the perils of MP3 and suggests investors need to think differently, shaping strategies around cash-flow yields - connecting equity cash flows to stable sources of spending in the economy.
Investors need to ensure they are accessing the new economy if they are to benefit from the growth story that drives emerging markets returns. Investors at the Fiduciary Investors Symposium talk about how they allocate to emerging markets.
One of the silver linings of the pandemic has been that location is not a restraint on investment when it comes to investing in venture capital with investors seeing venture opportunities springing up in all corners of the world.
The interruptions to work and the revolution of technological tools in 2020 have changed thee way investors assess funds managers. A discussion around due diligence in a lockdown environment finds that allocators have tended to stick with existing relationships through the pandemic making it difficult for managers approaching investors for the first time to form relationships and win mandates.
The sharp market falls triggered by the pandemic brought the longest recovery ever in modern finance to an abrupt end. But despite the turmoil unleashed by COVID, it has not wrung out the market excesses of the last 13-year cycle. It means another wave of corporate failures could appear on the horizon in a shorter timeframe than expected, and offer more opportunities for distressed debt investors, according to Victor Khosla founder of SVP Global.
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