Macro risks remain dominant: Cambridge

Macro-economic risks remain the biggest investment concern this year, while certain distressed assets will present the best opportunities, according to managing director of Cambridge Associates, Sandra Urie.

“The dislocation in European markets has already created investment opportunities across different credit markets, and we believe these may expand as the pace of European bank deleveraging accelerates,” she says.

“We believe investors should consider staggering commitments to European distressed funds over time, though we recognise that some European distressed funds are already finding attractive opportunities, and that some funds will offer vintage year diversification through a multi-year capital call structure.”

The timing of how this occurs may be more difficult to assess, she says, as a bank’s decision to sell an asset can be influenced by a variety of factors. She says investors should also stagger investments over time.

“On one hand, some banks have taken write-downs on assets or face higher capital charges and may therefore be open to sales, while on the other, significant government equity stakes in banks and the availability of liquidity, for example through repo lines, means that the pressure to sell assets may be reduced.”

In addition, she says European banks’ continued reductions in loan commitments are creating a vacuum, which hedge funds and private equity firms are filling.

However a defensive posture is important given the continued macro risks, Urie says.

“We continue to regard high quality equities with stable, proven franchises, and steady earnings and profits as an important core investment for participating in equity upside while investing in high quality assets that should be able to weather potential storms that may arise.”

The investment concerns at the beginning of this year, as identified by Cambridge, remain the same as in 2011.

At the start of last year, the firm’s five main concerns were:

• the corporate sector doesn’t spend, increasing the risk of global recession;
• the crisis in Europe escalates;
• a liquidity-fuelled boom gives rise to a global inflation scare;
• China overheats;
• and protectionism increases.

“While all of these concerns have serious implications, an overarching worry is that there is a tremendous amount of political disagreement about the appropriate way to deal with such risks,” Urie says.

“We enter 2012 in much the same place as 2011. Macro risks are our primary concern and the biggest risk we can see is the inability of the political system to deal effectively and decisively with the debt problem and that global imbalances lead to further erosion in confidence and further capital destruction.”