Michael Hintze has turned much more bullish.
The head of London-based hedge fund firm CQS tells clients that markets “will trend upward” thanks to stimulus driven by U.S. president-elect Donald Trump’s fiscal and tax policies.
And while he is cautious heading into year-end, the hedge fund manager does not think the markets will collapse. “The hunt for yield is yesterday’s story and cyclicals are back in favor,” Hintze proclaims in a letter to investors.
Hintze’s predictions are worth listening to: CQS is one of the most successful hedge fund firms this year. Its $2.8 billion flagship CQS Directional Opportunities Fund is up more than 30 percent this year after surging more than 6 percent in November alone. The firm describes the fund as a high-conviction, directional fund. CQS stands for “convertible and quantitative strategies”; it is a multistrategy firm with a emphasis on various credit strategies.
The CQS Global Convertible Arbitrage Fund gained 0.9 percent in August and is up 5.1 percent for the year. The $1 billion CQS ABS (asset-backed securities) Fund, which moved into the black in August, is now up 7.3 percent for the year. The CQS Diversified Fund, which is a fund-of-CQS-funds, is up 11.5 percent for the year.
In his August 2016 letter to clients, Hintze struck a nervous note. “There are uncertainties created by global geopolitical turbulence, rising populism, and political uncertainty in the U.S. ahead of November’s presidential elections,” he wrote.
However, in his December letter, Hintze seems especially excited about the prospects for credit investing, calling the current environment “a credit-picker’s market.” He tells clients there is growing differentiation between credits, which will lead to greater dispersion in the future.
Like most bulls since the election, Hintze is excited about the prospects for tax cuts in the U.S. and Democratic-style fiscal stimulus, which he expects will boost business. “The U.S. dollar has rallied and I expect it will continue to be stronger against most major currencies,” Hintze adds.
He says corporate credit should benefit from fiscal stimulus programs. And while he expects default rates to rise, they should still remain relatively low, especially if inflation picks up, which enables borrowers to pay back the money with cheaper dollars.
“Our investment style should benefit from this scenario and I feel energized about the investment environment presented to us,” Hintze says in the letter. “The divergence in central bank policies, for example, between the U.S., the EU and Asia, will enable us to extract relative value and greater dispersion suits our fundamental analysis-driven investment approach.”
He says CQS has repositioned a number of its portfolios over the last couple of months. While he says the firm has traded actively, Hintze adds, “I am looking for better entry points to add to risk over the coming months and, if markets were to pull-back materially, we would look to add to positions.”
And although Trump is threatening to impose tariffs on China, Hintze says this will not necessarily be bad for China. Rather, it could strengthen China’s position politically and economically. “Commodities will see a two-way pull, but on balance it should be a positive environment for them,” he elaborates.
However, Hintze says that in a higher rate and tariff environment, emerging markets in general “will likely be challenged.”
As for equities, Hintze says valuations are within historical ranges. He sees potential upside from proposed lower corporate tax rates and the potential boost from repatriation of foreign cash held at many multinationals’ international subsidiaries.
The upshot: Hintze says the current environment will no longer be friendly to what is known as the risk-free rate.
Rather, floating rate and short duration assets — meaning those with less sensitivity to interest rate moves — are attractive. This includes convertibles, loans, asset-backed-securities and high-yield.
“I am also confident in our ability to source assets for our structured credit book and to write risk for it,” Hintze adds.
He says this environment particularly lends itself to convertibles, noting they typically perform well during inflationary periods “due to their equity optionality.”
Discussing loans, Hintze says senior-secured loans can achieve a higher risk-adjusted yield than equivalent high-yield paper, plus it ranks higher up in the capital structure.
He likes ABS because of their floating rate characteristics. Hintze especially singles out residential mortgage-backed securities (RMBS), which should benefit from accelerated pre-payments as interest rates rise.
The fund manager also says there is relative value in collateralized loan obligations (CLOs), especially in Europe.
Hintze also favors high-yield credit and paper of companies that have what he calls event risk or situation change. “I also expect to see greater credit differentiation both in high yield and in investment grade issues,” Hintze adds.
It’s a new era...for now.
