Howard Marks, one of the best-known specialists in distressed debt investment, has warned that the recent global market recovery will unravel as the toll from the coronavirus pandemic mounts, the economy slides into a deep recession and corporate defaults spike.
Despite falling back again on Tuesday, the FTSE All-World index has climbed more than 14 per cent since its nadir in late March, after aggressive action from central banks and governments to ameliorate the economic impact of the coronavirus outbreak.
But Mr Marks, the billionaire investor who founded Oaktree Capital Management to capitalise on market dislocations caused by economic downturns, cautioned in his latest memo to clients that the bounce “reflected too much optimism”.
The 73-year-old investor, whose regular client memos published over the past 30 years have become popular reading among investment professionals, predicted that markets had further to fall given the severity of the economic and financial shocks that the coronavirus pandemic has triggered.
“The negative case encompasses rising numbers of infections and deaths, unbearable strain on the healthcare system, job losses in the many millions, widespread business losses and mounting defaults,” he said. “If these things arise, investors are likely to shift from the optimism of last week to the pessimism that was prevalent in the rest of March.”
Oaktree, a US investment group with $125bn of assets under management at the end of 2019, specialises in corporate debt, especially the “distressed debt” of stricken companies.
Some economists forecast that the coronavirus outbreak could trigger the biggest US recession since the Great Depression, but are largely hopeful that extraordinary stimulus from the government and the Federal Reserve will soften the blow and potentially even lead to a strong recovery later this year.
Yet in his latest missive, Mr Marks struck a glummer note. He warned that the US in particular would struggle to resolve the “conflict between social isolation and economic recovery” and expressed doubts that the recent stimulus packages would be sufficient.
“I’m concerned that the number of cases and deaths will continue to rise as long as we fail to emulate the successful countries’ actions. The health system will be overwhelmed,” Mr Marks said. “There will be a point where there doesn’t seem to be an end in sight. I’m afraid the headlines are going to get much uglier in this regard.”
Some strategists also argue that the recent stock market recovery is merely a classic “bear market rally” ahead of another slide, with Bank of America warning that “banking on a rapid recovery may be banking on a miracle”.
Social isolation, disease and death, economic contraction, enormous reliance on government action . . . are all with us, and the main questions surround how far they will go
Jonathan Ruffer, the head of Ruffer Investments, is also sceptical of the market bounce, warning in a letter to his investors on Tuesday that the current crisis was even harder to navigate than 2008.
“Leverage has flooded into every asset class,” he wrote. “Until the market becomes calmer, it will suffer all the vagaries of a civil war. The biggest danger comes from an overwhelming desire in all of us to ‘buy the dips’.”
Mr Marks echoed this view. Even looking past the immediate outlook for markets, Oaktree’s founder worried that employment would not bounce back as quickly as some economists expect, given the long shadow the coronavirus outbreak would probably cast over sentiment.
“What will be the impact of long-term inactivity on the ability of the economy to produce? How long will it take to restart the economy and bring it back to its previous level of functioning?” he wrote. “Social isolation, disease and death, economic contraction, enormous reliance on government action and uncertainty about the long-term effects are all with us, and the main questions surround how far they will go.”
Copyright The Financial Times Limited 2020
2020 The Financial Times Ltd. All rights reserved. Please do not copy and paste FT articles and redistribute by email or post to the web.
