Volatility investor warns of false dawn for US stock market


Investors encouraged by the rally in US stock markets this summer should not relax their vigilance so soon, as concerns over corporate debt will likely trigger another downturn later this year, one of the most prominent analysts has predicted. global volatility.

While the sharp fall in share prices in the first half reflected worries about future earnings due to inflation, investors have yet to factor in the effects of rising interest rates on overleveraged companies. , Paul Britton, founder of Capstone Investment Advisors, told the Financial Financial Times. Time.

He warned that news of some companies struggling to refinance debt at affordable rates would spook markets again, likely in the fourth quarter or early 2023.

“We are nearing the end of phase 1, a revaluation of growth. Phase 2 is more interesting for me. It’s more of a credit cycle,” Britton said. “People are upset that they lost money, but there is no fear.”

“Q4 and Q1 headlines are going to be about people struggling to refinance, and nervous investors are going to start selling,” he said. “By Q4 or Q1 it will change to fear.”

While many companies have taken advantage of extremely low interest rates in 2020 and 2021 to refinance their debt for very long periods, signs of stress are starting to appear in the debt markets.

Bankers last month postponed debt financing for the $16.5 billion takeover of software company Citrix by Vista Equity Partners and Elliott Management after struggling to find willing lenders. When companies moved forward, they often had to accept more onerous terms than in the previous 18 months. Banks, including Bank of America and Goldman Sachs, which initially committed to finance such transactions suffered losses.

Capstone, which had $9.1 billion in assets under management as of July 1, is taking advantage of the choppy markets. It not only manages one of the largest hedge funds in the world specializing in volatility, but also helps institutional and high net worth clients protect their portfolios against extreme risks.

The investment group’s global fund rose 0.8% in the first half and its dispersion fund rose 14%, according to a person who saw the results.

Global financial markets swung sharply in the first half as the S&P 500 index entered a bear market amid concerns about a looming recession and a tightening of monetary policy by the Federal Reserve.

But as the equity market has recently found its footing, volatility gauges such as the Cboe’s Vix Index have calmed down; earlier this week, the Vix closed below its long-standing average of 20 for the first time since April.

A fierce debate has divided the market over whether the rebound in US equities can persist, particularly if the Fed raises interest rates more aggressively or faster than investors are betting.

Britton, a former floor trader who profited from the volatility of the Asian and Russian crises in the late 1990s but suffered losses in the 2008 financial crisis, said he did not expect the number of business bankruptcies is higher than in past recessions. The problems are likely to be concentrated among companies rated below investment grade, he added.

“Leveraged loans are at the top of my list, and high-yield debt for anyone who doesn’t have cash,” he said.

Refinancing problems will have an outsized effect on market sentiment, he said, as investors have become too complacent for central bankers to come to their aid with lower rates. This time, he predicted, Fed governors will stick to their inflation-fighting mantra and keep rates higher.

“They don’t want to recreate what they did today. Any intervention they make to stabilize the markets will be much smaller [than previous efforts] and the market is going to be severely disappointed,” Britton said. “The Fed and other central bankers are going to be incredibly timid.”

Indeed, Mary Daly, chair of the San Francisco branch of the Fed, warned this week that it was far too early to “declare victory” in the central bank’s fight against high inflation.

Britton said he doubts the Fed can avoid a recession, which could push the US unemployment rate to 4.5% from its current level of 3.5%.

“At the end of the day, the Fed has an extraordinarily difficult job. [the economy] is a very large plane that they are trying to land on a very short and very narrow runway. They could stick the landing. I just think it will be difficult.

Additional reporting by Laurence Fletcher in London and Eric Platt in New York


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