Investors, buoyed by the rebound in US stock markets this summer, should remain alert as concerns about corporate debt are likely to fuel another recession later this year, said one of the world’s top volatility experts. has predicted.
Paul Britton, founder of Capstone Investment Advisors, told Financials that the sharp drop in share prices in the first half of the year reflected concerns about future earnings due to inflation, as investors still believe high interest rates for heavily indebted companies. Effects were not taken into account. Times.
He warned that news of certain companies struggling to refinance their debt at cheaper rates would rock the market again, perhaps in the fourth quarter or early 2023.
“We are nearing the end of Phase 1, a re-evaluation of development. Step 2 is more interesting to me. It’s more than a credit cycle,” Briton said. “People are upset that they lost money, but are not afraid.”
“Headlines in Q4 and Q1 have problems with refinancing and panicked investors will start selling,” he said. “It will turn to fear by Q4 or Q1.”
While many companies took advantage of the extremely low interest rates in 2020 and 2021 to refinance their debt for a very long time, the debt markets are showing the first signs of stress.
After struggling to find willing lenders, bankers last month shelved debt financing for Vista Equity Partners and Elliott Management’s $16.5 billion acquisition of software company Citrix. When companies have moved on, they have often had to accept more difficult conditions than in the past 18 months. Banks that originally entered into such deals, including Bank of America and Goldman Sachs, have suffered losses.
Capstone, which had $9.1 billion in assets under management as of July 1, is benefiting from troubled markets. Not only does it operate one of the world’s largest volatility hedge funds, but it also helps institutional and wealthy clients protect their portfolios from excessive risk.
According to one person who looked at the results, the investment group’s global fund rose 0.8 percent in the first half and its spread rose 14 percent.
Global financial markets jumped wildly in the first half as the S&P 500 index entered a bearish market amid concerns of an impending slowdown and tighter monetary policy from the Federal Reserve.
But as the stock market has gained traction of late, volatility indicators like Cboe’s Vix Index have calmed down; Earlier this week, Wix closed below its long-term average of 20 for the first time since April.
A heated debate has divided the market over whether US stocks can continue to rally, especially if the Fed hikes rates more aggressively or faster than investors.
The Briton, a former floor trader who benefited from the volatility of the Asian and Russian crises in the late 1990s but suffered losses in the 2008 financial crisis, said he doesn’t expect corporate bankruptcies to spike compared to the previous recession. The number will be higher. The problems are likely to be concentrated in companies rated below investment grade, he added.
“Leveraged loans are at the top of my list and high-yield loans from anyone who doesn’t have cash flow,” he said.
He said the funding crisis will have a massive impact on market sentiment as investors are over-confident that central bankers will bail them out with lower interest rates. This time, he predicted, the Fed governor would stick to his anti-inflation mantra and keep interest rates high.
“They don’t want to repeat what they did today. Any intervention they make to stabilize the markets will be quite small. [than previous efforts] And the market will be badly disappointed,” said Briton. “The Fed and other central bankers will be incredibly gun-shy.”
Indeed, Mary Daly, Chair of the Fed’s San Francisco branch, warned this week that it was too early to “declare victory” in the central bank’s fight against high inflation.
The Brit said he doubted the Fed could avoid a recession and lift the US unemployment rate to 4.5% from the current 3.5%.
“After all, the Fed has an extraordinarily difficult job. It is [the economy] You are trying to land a very large plane on a very short and very narrow runway. You might survive the landing. I think it will be difficult.”
Additional reporting by Lawrence Fletcher in London and Eric Platt in New York