In this episode of Delta, Andrew ‘Jacko’ Jackson is joined by Caroline Murphy, Multi Asset Portfolio Manager, Vincent Benguigui, Credit Portfolio Manager, Stephane Michel, Senior Portfolio Manager, and Laura Vaughan, Head of Direct Lending, to discuss bubbles.
If the past has taught us anything, it’s that the circumstances in which bubbles occur carry certain macroeconomic traits. “There’s a multitude of things happening at once”, says Murphy. As well as high valuations and US market capitalisations that outstrip GDP, bonds are proving expensive relative to equities, property prices are on the rise and global debt stands at $281tn.
“Buzzwords that we would have only expected in financial circles are now on everyone’s lips,” Murphy adds, pointing to a “market frenzy” in issuances, initial public offerings, and Special-Purpose Acquisition Companies (SPACs).
Armed with experience of previous bubbles, Michel says: “We are very comfortable to admit that valuations are lofty. Things are expensive – and they will probably get cheaper at some point”.
“We’ve all looked at this bubble, this balloon, and assumed that it can be deflated… History suggests that that controlled mechanism is very rare. We tend to have more of a pop than a gentle release of the tension”.
Credit markets paint a similar picture, with Benguigui also citing “high valuations”, as well as “long investor positioning [and] a premium for hedging in indices that trade more on macro news than on an idiosyncratic basis”.
But it’s not all doom and gloom. “If we look at the last 12 months, default rates have spiked. But this means that indices and markets as a whole are actually cleaner now than they were a year ago”, Benguigui adds. With the easing of lockdown restrictions, the macro environment is recovering – and companies are thinking about repairing their balance sheets.
Meanwhile, within the direct lending space, Vaughan is similarly seeing investee companies “that have maybe had to adjust their models because of lockdowns, [their] liquidity has stayed relatively robust, they have strong fundamentals and they’re ready for economies to open up again”.
If we are in a bubble, then is it going to burst and how would we best navigate this? To find out, tune into Delta.
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