Expert: Sal Naro, Managing Director, Lazard Asset Management Facilitator: John Chapman, Orion Consultancy
Session Summary:
- Macro backdrop is equity friendly
- Sustained inflation is looming
- Credit dynamics require investment in both long and short credit
Unlike traditional long-only strategies, Lazards ability to invest in both long and short credit allows them to hedge interest rates, capitalise on credit rating trajectories and create alpha from the coming return of credit differentiation.
Context
Providing alpha in an optimal risk-controlled manner with the looming macro backdrop, inflation risks and credit dynamics is a major challenge for the industry.
Key takeaways in more detail:
- Macro backdrop is equity friendly: We are currently seeing equity-friendly behaviour and M&A, accommodative central banking policy and rethinking of the supply chain.
- Sustained inflation is looking: Monetary supply increase, economy re-opening, labour shortages/wage inflation and supply chain disruptions are all inflationary strong headwinds.US Federal Reserve and other central banks have provided unprecedented liquidity, fuelled companies dependent on a low interest rate environment to refinance debt.Fed Bank rate hikes, analogous to 9 hikes seen from Dec 2015 to Dec 2019.
- Credit dynamics: Credit dynamics are typically – weak covenants, high leverage, historically tight spreads and low yields.
- Risk to fixed income – higher rates, lower bond prices, coupons too low to offset capital losses, High Yield and perpetual structures susceptible to extension risk and “current pay” High Yield at deep discounts.
- Secular winners increasing their market share in a post-pandemic world.
- Vulnerable industries seeing both cyclical and structural headwinds.
- Disruptive technologies still in early-to-mid stages.
