Howard Marks: Investors May See the Lowest Return Period in History
Howard Marks, co-founder of Oaktree Capital, warned investors in his latest memo that expected returns would fall to record lows and that the market was vulnerable to “negative surprises” and became very vulnerable.
You should know that the U.S. stock market has rebounded strongly in recent months, mainly due to a series of economic stimulus measures by the Federal Reserve and the U.S. government.
But Marks believes investors need to be prepared for the tough economic journey, because this downward cycle cannot be completely cured by economic stimulus alone.
In addition, he said:
In my opinion, low interest rates are the main feature of the current financial environment. At this time, prudent investors should include the factor of “the lowest expected return in history” into the list of risks to be considered.
In his memorandum, coming into focus, released on Tuesday, he said he had been describing a fragile investment environment for many years, including “the lowest expected return ever”, investors’ risk-taking behavior in pursuit of high returns, excessive asset prices, and abnormally high uncertainty.
He believes that the expected rate of return will fall even more when the outbreak of the new crown causes the Federal Reserve to cut interest rates, which are considered necessary.
Mark cited a number of reasons for interest rates to reduce returns, from stimulus effects to lower risk-free rates.
If the expected rate of return in the past few years is very low, it is even lower now because of lower interest rates, Mr. marks said. Cash returns are close to zero, investment grade bonds are 2%, high-yield bonds are 5%, and stocks are expected to return 5–6% — at the same time, a lot of capital is eager to put into use.
As a result, achieving adequate returns may become more difficult.
So, in March this year, after the real estate market entered a short and cheap period, we returned to a world full of low returns. But because most investors don’t lower their requirements or target returns, they have to take higher risks to pursue returns.
Marks added:
In my opinion, when the uncertainty is high, asset prices should be low, thus creating compensatory high expected returns. But with the Fed setting interest rates so low, the rate of return is the opposite.
He believes that investors are not likely to win, and the market is vulnerable to “unexpected” negative effects.
So what should investors do?
According to the current environment, Marks has developed a series of investment strategies for investors
1. Invest as usual and expect the return you want from your past. But in fact, he says, it’s just a distraction strategy. In terms of current pricing, what you had in the past offers a lower return.
2. Invest as usual and accept today’s low returns. This strategy is more realistic than the first, but the prospect is not exciting.
3. Reduce risk and accept lower return in case of high uncertainty. It makes sense, but you’ll get a lower return.
4. Hold cash with a return close to zero and wait for a better environment. However, he personally expressed his opposition to this view. He said holding cash for a better environment is an “extreme” move and certainly not needed at the moment. While you’re waiting for the adjustment, your rate of return is about zero. Most institutions cannot do this.
5. Increase risk and pursue higher return. This “should” work, but the certainty is not high, especially when so many investors are trying the same approach. The high level of uncertainty tells me that this is not the time to invest heavily, as lower absolute expected returns seem unlikely to make up for this.
6. Invest more money in special niche markets and special asset managers. In other words, consider investing in alternative markets, private equity markets and “alpha” markets, which are likely to take in bargains and have more bargaining potential. Of course, this will also bring liquidity shortage and manager risk.
‘none of the above strategies is completely satisfactory, and none of them is completely non declining,’ Mr. marks warned.
“How do you adjust your portfolio risk?” this is a question that every investor should think about in the current environment.
Source: Oaktree Capital Website
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