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Trends Watch: March 29, 2018

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks to Brendan M. Whittington, Senior Analyst, BulwarkBay Investment Group.

What is your outlook for alternatives?

Alternatives is such a broad definition that it is hard for me to give a one-size fits all view. Generically speaking, I think active management is going to make a comeback as global central banks gradually begin to exit their synchronized coordination of asset buying. This should reward security selection once again and come to the benefit of long/short equity and credit managers. Given stretched valuations and elevated leverage at corporates, I do think this bodes poorly for private equity who currently may be investing in similarly quality vintages as those of the 2006-2007 era. For me, as a high yield and distressed credit investor, this has me very excited as I see this as my raw material that I will be working with in the coming 12 to 24 months.  

What is your outlook for the economy?

The economy appears to be doing well within the context that we are likely in the latter parts of the economic cycle. Unemployment is low and we are beginning to hear about labor scarcity in select regions of the economy but a significant pick up in wages has yet to manifest itself. Consumer and producer price inflation has also begun to percolate. However, I am wary about the level of debt in the economy and that inflation is lurking around the corner. I am watching the yield curve carefully for a possible inversion. An inversion could occur later this year or in early 2019. Based on historical patterns, recessions often follow 12-18 months thereafter. I do not think it’s impossible to see the U.S. entering a recession by early 2020. In short, barring a shock to the system, the economy is likely going to continue to muddle along in the near term though many signs of an end to this cycle are beginning to emerge.

What keeps you up at night?  

Global indebtedness and what it could do to rates. From individuals to corporates and finally sovereigns, the system is simply overleveraged. Consumers have once again packed on personal debt be it in the form of credit cards, student loans, auto loans, etc. Corporate leverage has now surpassed pre-2008 levels due to the combination of share repurchases and M&A/LBOs. Finally, across government entities, debt continues to skyrocket. Now, however, central banks, the Fed in particular, are planning to reverse course on their asset purchases. The acceleration of debt growth, late cycle economics and the supposed end of money printing could cause interest rates to rise substantially. Key borrowing rates for corporates and individuals (LIBOR) and treasury rates for the U.S. government have seen meaningful moves higher in recent months and have even at these low levels caused tremors across the markets. Given the leverage throughout the system, merely a reversion toward the mean in rates could easily cause something to break.

 

Elana Margulies-Snyderman is an investment industry reporter and writer who develops articles, opinion pieces and original research designed to help illuminate the most challenging issues confronting fund managers and executives.

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