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The Markets Have a Mission

In 2015, smooth sailing in global capital markets gave way to choppy seas. Volatility, with a deflationary edge, became the backdrop. Do investors fear these conditions or embrace them as opportunities? What are the larger forces that drive the markets’ evolution? What is their role in society and how to do they interact with changing regulatory agendas?

Those were the big questions addressed by the speakers at the London Summit “Global Capital Markets” panel, all accomplished leaders in the investment industry. Maybe the answers weren’t quite definitive, but there was a vibrant exchange of observations and strategies.

Moderator Mike Milken, chairman of the Milken Institute, spoke about how capital markets generate opportunity and respond to social needs, noting that the lack of strong markets in the former Soviet Union contributed to the malaise there. Brigitte Posch, head of emerging markets corporate debt for Babson Capital, amplified that view by encouraging the leaders of developing nations to focus on deepening their bourses. “It allows those sovereigns much more efficiently to manage their assets and liabilities to be less vulnerable to exogenous shocks,” she said.

This year has in fact been marked by shocks, or at least disruptions. We’ve seen a slowdown in China, disorder in that nation’s markets, and fear that has colored perceptions of many emerging economies. Globally, commodity prices and currencies are struggling, yields are higher in high-yield, and central bank policies are uncertain. The oil industry, leveraged as many of its players are, is hurting both the overall energy complex and the credit markets.

But these pros are tasked with distinguishing the assets that will stay down from those that will rebound.  

“Technical volatility for an opportunistic credit manager is a really good thing,” said Richard Byrne, president of Benefit Street Partners. “We’ve lived in the equivalent of the Sahara desert for the last six years”—no matter what happened, the market just shrugged it off. “When you have conviction around the fundamentals of companies, particularly the higher-quality companies, and they drop for no real reason other than the technicals, that’s a buying opportunity.”

Robert Kricheff, senior vice president at Shenkman Capital, is on the same page. Much of the heightened volatility we’ve seen is technical, he agreed, or subject to trading dynamics rather than fundamental performance. “Companies away from energy and commodities are continuing to report some good numbers, and we think it’s created opportunity, given where spreads are in the non-energy spaces within high-yield, and also given the [low] default rate.”

At Alliance Trust Plc., the order of the day is to employ the capital markets to heal the world as well as generate healthy financial gains. CEO Katherine Garret-Cox asks clients what they aim to achieve with their funds on a broader level. Alliance rarely invests in tobacco or fossil fuels but Garret-Cox said, “We guarantee that we will over time give you better rates of return than mainstream benchmarks…. Our global equity portfolio emits 70 percent less carbon than the benchmark and is delivering you a higher rate of return.”

More on the broader view: Milken unveiled a slide illustrating the remarkable extension of lifespans on Earth. The numbers for Asia are particularly impressive. An Asian person born in 1900 could expect to live to 28. Today, an infant’s life expectancy there is 72. Among other effects, this transformation means more production, more consumption, more savings and more investment.

Although Milken’s question for Fitch Group’s Paul Taylor involved currencies, commodities, credit ratings and “disintermediation by technology,” Taylor said the moderator’s demographic point is an example of the forces that will drive capital markets globally. He spoke about the throngs of people moving into the middle class and institutionally managed funds mushrooming to $100 trillion. The World Bank, he noted, reported on the trillions of dollars’ worth of infrastructure needed for development. “There will be a massive growth of money available to be put to use,” he said. “So if the capital markets get it right, we can put that money to work.”