By Eric Uhlfelder
With interest rates rising and stock prices falling, 2019 is
setting up to be one of the most challenging environments investors
have faced in some time.
To get a sense of what some high-profile investors are thinking
for the year ahead, The Wall Street Journal interviewed several
hedge-fund managers with some of the most consistent long-term
performances.
The managers have a variety of ideas, from being bullish on
commodities and Turkish banks, to shorting U.S. leveraged loans and
U.K. gilts. Their fears included rising global trade tensions,
geopolitical risks surrounding the European Union and the euro, and
a potential slide in investor confidence. Other hedge-fund managers
say they fear the unrecognized costs of climate change. Here are
four of the managers' outlooks.
Natural Gas, Oil and Gold (buy)
Nigol Koulajian -- AlphaQuest
Strategy: Systematic macro
Assets: $1.7 billion
Launch Date: 1999
Annualized Net Returns: 11%
Nigol Koulajian runs a purely systematic shop, an industry term
meaning he uses various proprietary programs that identify when the
character of an asset's price movement is changing. Often, when
prices are bouncing all over the place, that can indicate when a
high is being formed, or now, as in the case of natural gas, crude
oil and gold, when a rebound appears to be set to take off. That's
what Mr. Koulajian's programs say is now happening.
"We are currently seeing an unwinding of short positions on
natural-gas contracts which had been built up by hedge funds and
other institutional investors," Mr. Koulajian says. "Price
volatility is revealing larger swings on the upside and smaller
movement on the downside, suggesting a bottom is forming on
natural-gas prices and rising prices likely in 2019."
To Mr. Koulajian, this also indicates oil prices will soon stop
falling and start rising. He expects gold prices will start moving
upward, too.
The biggest risk he sees in the coming year: stagflation, where
inflation and interest rates rise while GDP growth slows.
Leveraged loans (sell)
Hanif Mamdani -- PH&N Absolute Return
Strategy: Multistrategy/credit
Assets: $1.3 billion
Launch date: 2002
Annualized Net Returns: 13.5%
With the credit market having peaked and a bear market likely
under way, Canadian hedge-fund manager Hanif Mamdani says a key
area of concern to him is the market for leveraged loans -- senior
loans made to largely below-investment-grade borrowers.
The leveraged-loan market is now the second-largest corporate
debt class in the U.S., behind investment grade, standing at $1.3
trillion. Exceeding high-yield debt issuance, leveraged loans have
become the go-to market for highly indebted firms, says Mr.
Mamdani.
Insatiable investor demand for high-coupon, floating-rate debt,
fueled by how well leveraged loans held up during the financial
crisis, has led to the doubling in size of these loans over the
past six years. Mr. Mamdani figures that upward of 80% of these
loans are issued based on optimistic projections, excessive
leverage, and with minimal covenants. With interest rates rising
and global growth ebbing, he expects these loans could sell off by
10% or more over the next 18 months.
A simple way that individual investors can play this thesis is
by shorting -- betting against Invesco Senior Loan ETF (BKLN), an
exchange-traded fund that tracks leveraged loans. Because such a
short requires payment of the 5% interest yield that the ETF spins
off, Mr. Mamdani recommends partially covering that liability by
simultaneously being long one-year Treasury bills. He projects net
return in 2019 on this defensive hedge to be from 5 and 7%.
Turkish Banks (buy)
Carl Tohme -- Jabcap EMEA
Strategy: Emerging markets
Assets: $270 million
Launch Date: 2010
Annualized Net Returns: 9.96%
With emerging-markets valuations bouncing around like a pinball
for years, Carl Tohme may have the toughest job of all our
managers.
"We have been negative on Turkey since the beginning of 2018,"
says Mr. Tohme. "But we believe rate increases by the Central Bank
of Turkey, which has doubled its benchmark rates to 24% in
September, are beginning to address some of the country's financial
challenges." This has helped the Turkish lira to rally back more
than halfway from its 40% decline against the greenback in
2018.
Although he doesn't expect to see a V-shaped recovery, Mr. Tohme
thinks the Turkish economy and market are on the mend, especially
if energy prices stabilize and the Federal Reserve eases up on
interest-rate increases.
Because he believes Turkish banks will be recapitalized by the
end of the first quarter of 2019, Mr. Tohme considers them to be
trading cheap, below 0.5 times book value and around 3.5 times
forward earnings, which prices in a projected recession in
2019.
He likes Akbank and Garanti Bank (the latter majority-owned by
the Spanish bank BBVA). "These are well-regulated, conservatively
managed, private institutions," says Mr. Tohme, "with solid capital
and liquidity ratios, which should help them weather the recession
and thrive in the subsequent recovery."
Mounting trade tensions worry Mr. Tohme, especially if they
continue to fuel volatility across all markets. But if China and
the U.S. begin to work out their differences, and if the U.S. holds
off on further rate increases, Mr. Tohme thinks emerging-markets
shares and their underlying currencies should outperform developed
markets in 2019.
Gilts (sell)
Bob Treue -- Barnegat
Strategy: Fixed-income relative value
Assets: $661 million
Launch Date: 2001
Annualized Net Returns: 15.9%
Relative-value trades are where managers look for financial
instruments that should trade in lockstep with one another but
whose values have deviated. Managers bet these spreads will
close.
"Government bond yields should be higher than inflation," says
Bob Treue. "But at the end of the year, the 30-year British gilt
yielded 1.95% while an equivalently termed U.K. inflation swap was
at 3.30%."
While the Bank of England's unwinding of quantitative easing
should help boost yields on long-term U.K. government bonds, Mr.
Treue says it isn't clear when this correction will occur. But he
says the market will make it happen.
Mr. Treue is short the long-term gilt, believing its yield will
rise and price will fall, and he is long inflation swaps, believing
the inverse will happen. He has structured the trade as to
currently earn money as he waits. The carry costs of the trade can
be offset by the yield that part of the transaction generates.
Because the inflation swaps are so mispriced, compared with the
gilts, the yield currently exceeds costs.
The manager sees significant dislocation from quantitative
tightening that's now under way in the U.S., creating mispricing in
the debt market. What he fears most is a rapid meltdown in market
confidence as global trade tensions and deglobalization produces a
"free-for-all" mentality.
Mr. Uhlfelder writes about global capital markets from New York.
He can be reached at reports@wsj.com.
(END) Dow Jones Newswires
January 06, 2019 22:18 ET (03:18 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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