Michael Hintze, the founder of London-based hedge-fund firm CQS, says that the U.S. economy could pleasantly surprise many investors in 2013, driven in part by continuing recovery in the housing market and the rebuilding of bank balance sheets.
On the whole, Hintze is bullish on 2013, as he thinks central bank stimulus should continue to boost credit and equity markets, according to a question-and-answer session with the manager posted on the firm’s website. However, he expects more volatility in the markets because of increased regulation. “While I have been constructive on markets for a while, now there may be reasons to be more balanced,” he states in the report. Hintze, a native of Australia, founded CQS, which manages approximately $11 billion, in 1999.
In the Q&A, Hintze was not optimistic about the prospects for the eurozone, calling it “structurally challenged,” with prospects for nil or slow growth for an extended period of time. “While Mario Draghi is doing a good job and progress is being made, I am concerned that until the Eurozone addresses its structural issues, zero-to-slow growth is likely and, combined with (quantitative easing) in Europe, the UK, Japan and the US, there is a risk of competitive devaluation,” Hintze explains. He also noted in a recent opinion column for Alpha that the political process in the eurozone might also hamper a recovery in the region.
Hintze cites the diminishing effect of each round of global monetary stimulus — known as quantitative easing — both on economic activity and markets, the difficulty political leaders have in making tough decisions, continued concerns about global growth in general and fears of heightened geopolitical turbulence. He also thinks investors and others are too optimistic about China’s growth prospects, and he is looking for a continued slowdown resulting in growth of less than 7 percent.
On the other hand, Hintze thinks U.S. growth could be higher than many people expect, thanks to housing and bank balance sheet deleveraging. Other reasons for optimism include positive demographics, a possible surplus of cheap energy from natural gas and self-sufficiency in agriculture. “One should not underestimate the U.S.’s capacity for innovation and productivity,” Hintze adds.
So how should investors play these scenarios? For one thing, Hintze is looking for weakness in the euro and yen. He says over the short-term, he likes long positions in risk assets through financials, although he warns to expect significant volatility until the major imbalances and structural issues have been addressed.
He says inflation is another risk investors should be concerned about due to the expansion of central bank balance sheets. He says gold is no longer a reflexive way to play this after its long, rapid run-up in price. Rather, he says he favors exposure through what he calls “a risk reversal.” He is bullish on agricultural commodities as well as owning agricultural land outright and certain listed agricultural shares.
And although he does not think there is a bubble in government bonds, Hintze believes the risk-free rate is too low. On the other hand, in credit he still sees “significant opportunity” on the long and short sides. “The shift from bank to market-based financing, especially in Europe, probably means the ‘real’ cost of capital is likely to rise,” he stated in the Q&A. “The volatility of credit markets has also risen, in part, due to the Volcker rule.”
Hintze still sees value in B and BB-rated corporate bonds, and he adds that new European capital requirements offer a “compelling opportunity” in European senior secured loans and structured credit. He also thinks equities have more room to gain, even after the market’s rally in 2012. He cites dividend yields, which are way above their lows, and notes the earnings yield is “arguably compelling.” And Hintze says Japan is potentially intriguing, with its widely-followed TOPIX index trading at 11.3 times earnings and a 5 percent discount to the MSCI World index.
CQS describes itself as a credit-focused, global multistrategy with a particular expertise in relative value and structured credit. It invests across the capital structure, including in equities.
The firm’s CQS Directional Opportunity Feeder Fund has been one of the year’s best performing hedge funds, rising 32 percent through November, while the CQS ABS Feeder Fund was up 14.67 percent. (Alistair Lumsden, the firm’s chief investment officer for ABS, recently left the firm; Simon Finch, the firm’s chief investment officer for credit, has taken over for him.)
