Howard Marks: A ‘Sea Change’ Has Come to Investing

Risk aversion and higher rates are now embedded features, which has big implications, the celebrated investor says.

Howard Marks has made his mark for decades as a deep thinker about markets. Now the co-chair of Oaktree Capital Management sees a “sea change” taking place in the investing environment, with higher interest rates, loftier inflation and less risk-taking as the new trend.

In the latest of his celebrated memos to clients, Marks wrote, “Investors can now potentially get solid returns from credit instruments, meaning they no longer have to rely as heavily on riskier investments to achieve their overall return targets.”

The investing world will be “different from what it was over the last 13 years—and most of the last 40 years,” Marks continued. “It should follow that the investment strategies that worked best over those periods may not be the ones that outperform in the years ahead.”

The benchmark interest rate will be in the 2% to 4% range for the next several years—not far from where it is now—compared with the below-2% standard of recent years. To Marks, “The bottom line is that highly stimulative rates are likely not in the cards for the next several years, barring a serious recession from which we need rescuing (and that would have ramifications of its own).”

A much more pessimistic mindset rules today, with investors expecting a recession, risk aversion rising and the Federal Reserve tightening, he observes. Given that the buoyant equities outlook that reigned from the financial crisis all the way through 2021 is gone, the best news Marks sees is that credit investing finally should offer a decent return.

He points out that the “real fed funds rate,” i.e. inflation-adjusted, is negative. The Consumer Price Index is down, but is still high at 7.1%, and the Fed’s new rate benchmark is 4.25% to 4.5%, which translates to a deficit of at least 2.6 percentage points.

In the memo, Marks gave a historical overview of the two previous seas changes he has witnessed during his financial career, which began in 1969, when he started work at what is now Citigroup as a stock analyst.

The first was the introduction of risk management into conventional investment some 50 years ago, the advent of junk bonds, private equity and other such new financial opportunities. The second sea change arrived with a four-decade run of low interest rates, which of course propelled risk-taking.

Now, with the third sea change, he wrote, “Things will be less rosy.” Nonetheless, the beneficiaries of this switch will be lenders and bargain hunters. That sounds like bondholders and value investors. Marks is known as a value stock player who also forays into credit markets.


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