'Now is a time to be cautious': The world's largest distressed-securities investor breaks down why an unstable economy leaves the market vulnerable to further shocks
Oaktree Capital Managementhigh yield portfolio manager Madelaine Jones says economic recovery depends on when the pandemic is resolved.
- "Until fundamentals really do improve, conflicting economic data and political shocks could spark more market ructions," she wrote Thursday.
- A large amount of company defaults in the future could be one of those shocks, said fellow portfolio manager David Rosenberg.
- "What people don't talk about enough is that companies accessing liquidity aren't getting grants; they're getting loans that will have to be repaid," he said.
- Visit Business Insider's homepage for more stories.
While some analysts have said that a
In an "Oaktree Insights" letter published Thursday, Jones said the economy hasn't fully recovered from the depths of the coronavirus crash. "Until fundamentals really do improve, conflicting economic data and political shocks could spark more market ructions," they said, adding that the economic recovery largely depends on when the pandemic can be resolved.
"The fundamentals tell us we're not out of the woods yet," the portfolio manager said, citing the historically high
Spiking levels of the coronavirus will undermine the economic recovery for the rest of the year, said Jones.
"Now is a time to be cautious," said Jones. "There are limits to what central banks can do to prop up
One of the limitations of central banks is how far they can go to provide liquidity to a company that's unable to repay its debts, Rosenberg added.
Read more:The chief strategist at JPMorgan's $2.3 trillion investing arm says the US elections could resolve a 'polarized' stock market amid sharp political divisions — and pinpoints 4 trades that are likely to benefit
He acknowledged that companies that may have otherwise defaulted during the pandemic have now "pushed off their cash crunch" for another year because of central-bank funded liquidity. But that liquidity can only prop up a company for so long, and defaults may come as a shock to investors who aren't ready, he said.
"What people don't talk about enough is that companies accessing liquidity aren't getting grants; they're getting loans that will have to be repaid," said Rosenberg. "So companies that have been struggling are now going to be even more leveraged exiting the crisis than they were coming in."
The default rate for 2020 will likely be 6% to 7%, according to Rosenberg. This is lower than the 12% strategists were forecasting in March when the market crashed, but still higher than the 2% average default rate from previous years, he said.
- Best budget 5GHz routers for faster speeds
- Naidu to chair virtual meeting with parties on RS agenda for budget session
- TRS MPs to meet on Sunday to chalk out party's strategy for Budget session of Parliament
- EXPLAINED: India’s annual Economic Survey
- With COVID expenses rising, taxpayers need more than an insurance rebate, says a wealth manager