Oaktree's Howard Marks Predicts 'Sea Change' In Investment Strategies
Investment strategies that worked over the past 13 years may not be the ones that outperform in the years ahead, Marks wrote.
After a "sea change", traditionally strong investment strategies might not outperform as conditions after the pandemic lows remain less favourable than what followed the 2009 global financial crisis, according to veteran investor Howard Marks.
“Investors can now potentially get solid returns from credit instruments, meaning they no longer have to rely as heavily on riskier investments to achieve their overall return targets,” Marks, the chairman of Oaktree Capital Management, wrote in a memo addressed to clients on Dec. 13.
Lenders and bargain hunters are poised to reap better benefits from the current environment than they did during the 2009-21 period, Marks said in the memo titled Sea Change.
Considering the environment remains markedly different from what it was over the last 13 years—and for most of the previous 40 years—“it should follow that the investment strategies that worked best over those periods may not be the ones that outperform in the years ahead”, he said.
Inflation and interest rates are likely to remain the dominant factors influencing investment environment over the next several years, Marks said in his note.
Inflation may remain higher than the prevalent levels since 2009, at least for a while, he said.
According to him, interest rates will be determined by the progress the U.S. Federal Reserve makes in bringing down inflation. “If rates go much higher in that process, they’re likely to come back down afterward, but no one can predict the timing or the extent of the decrease.”
The base interest rate over the next few years is expected to be in the range of 2-4%, not far from the current level of 0-2%, Marks said.
“… the bottom line is that highly stimulative rates are likely not in the cards for the next several years, barring a serious recession from which we need rescuing (and that would have ramifications of its own),” Marks wrote.
However, he said that Oaktree will not bet money on this belief.
The current market and economic conditions will be influenced by economic growth, inflation and interest rates, as well as exogenous factors, “all of which are unpredictable”, Marks said.
Keeping this in mind, a recession in the next 12-18 months is now a "foregone conclusion", and will likely coincide with deterioration in corporate earnings and investor psychology, the market expert said.
Credit market conditions for new financings are unlikely to become as accommodative as they were in the recent years, Marks said.
These changes may be long-lasting, or wear off over time, but the optimism and ease seen in the post-global financial crisis era is likely to be elusive for now, he said.