The time is right to make “good deals” in the financial markets after the widespread sell-off, according to Howard Marx, one of the most dangerous investors in debt problems in the world.
“I’m starting to be aggressive today,” Oaktree Capital founder and co-chair said in an interview. “Everything we do is significantly cheaper than it was six or 12 months ago,” he added, noting a drop in the prices of high-yield bonds, leverage loans, mortgage-backed securities and secured loan obligations. .
The main indicator used to measure US unwanted corporate debt saw a loss of just under 13% this year, its biggest since the 2008 financial crisis, according to Ice Data Services.
Loan prices offered to undervalued corporate borrowers fell by more than 5% and traded at an average of 93.27 cents per dollar, levels last seen in November 2020 just before the Covid vaccine breakthroughs were reported. -19, data from S&P and Loan Syndication and Trade Association showed.
Marx said the Los Angeles-based Oaktree did not make investment decisions based on macro-forecasts – such as how high inflation would rise or whether there would be a recession – nor did it try to determine market times.
“I think the idea of waiting for the bottom is a terrible idea,” he said. Assets may become cheaper than current valuations “in which case we will buy more”.
Marx, 76, co-founded Oaktree in 1995 with a strategy of investing in “good companies with bad balance sheets” and built the company into a powerful $ 164 billion investment. The company does not publicly disclose its financial results.
His career is based on big bets when and where others are reluctant to do so, and he sets out his investment views in a popular series of notes whose regular readers are Warren Buffett.
“We are more aggressive if we think …. . they are very profitable, “he said. “And we are more protective if we think that the market is uplifted and the behavior of investors is unwise.
In the last year, Marx has advocated positioning on the more defensive side. “I thought asset prices were reasonable given the interest rates, but I thought interest rates would rise, which means prices would fall.”
Financial markets sold out as the Federal Reserve began to raise interest rates sharply, putting pressure on cashiers around the world. Borrowing costs have risen, with the yield on high-rated corporate debt in the US averaging 4.72% this week, double the level at the end of 2021.
For the riskier groups, assessed as garbage by large credit rating agencies, the yield is now over 8.5% compared to 4.32%.
Oaktree, which sold to Canadian infrastructure group Brookfield for nearly $ 8 billion in 2019, is one of the oldest experts in pursuing unpaid debt companies. Marx said that while he expected the number of corporate bankruptcies to rise – after a period of developed markets where abundant cheap money from central banks kept them low – he did not think it would reach double-digit levels, as in previous crises.
Companies took advantage of low interest rates to lock in cheap financing during the pandemic, he said.
Most of Oaktree’s assets are managed in lending strategies, but there are also much smaller divisions in real assets, quoted shares and private equity. Marx questioned whether the average private equity fund could consistently outperform the listed markets, and said that leverage contributed to much of the sector’s return.
“Maybe the best private equity funds are really performing better, or maybe the rest are doing so in a short period of time,” he said. “But you can’t talk about the superiority of private capital in the long run based on the average private investment company and the research I’ve seen. Yes, private capital has produced very good returns in the last few upturns. But given their leverage, shouldn’t that be expected in such a period? ”
Until this year, and with the exception of a sharp sell-off at the start of the pandemic, US stocks were in a ten-year bullish market that Marx said was complacent. “When things go well, people don’t worry about the downside. And they’re entering new areas they’ve never been before. “
He cited areas as private assets where mass investors in stocks and bonds have expanded, some with seemingly little concern about comparing the fund’s liquidity with underlying assets. “This is bull market behavior,” Marx said. “But when you receive withdrawals in an illiquid market with declining values, those funds melt.”
Marx argues that the same psychological dynamics have led investors to cryptocurrencies.
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“The hotter the environment, the more people look at something like cryptocurrency and go from saying it might work to making it work. And then you get into trouble. ”
He admitted that he “does not know enough about cryptocurrencies to know whether it will work or not”, but said he was skeptical because it is impossible to assess them: “I believe that assets that do not have cash flow have no inherent value. . . much of the value must be conceptual and future-oriented. ”
Oaktree’s most famous recent deal was in China, where it seized two real estate projects in the crown from property developer Evergrande after failing to repay $ 1 billion in loans from Oaktree. Marx said that Oaktree had not yet sold the two sites – Project Castle in Hong Kong and “Venice” on the continent – but that “the process is going well. We control assets and are very optimistic.”
Marx said Beijing’s policy of zero Covid undermined Shanghai’s ambitions as a global financial center: “you can’t put an economy in a coma and expect vigorous activity.”
Additional reports by Eric Platt in New York
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