So we’ve all heard about the developed economies vs. underdeveloped economies – but the primary reason for these discrepancies are not a result of lagging capital investment or some other economic indicator. It is the direct result of developed or underdeveloped thinking which causes one economy to develop and another to under develop.
This is not only limited to traditional economic sectors (manufacturing, plumbing etc.) but can also be observed in cultural output. For example I like going to music concerts: classical, jazz, and free improvised. What I’ve noticed in Europe vs. a Lebanon or a Dubai, is that if my hobby is going to these music concerts is that I do not have options in Lebanon or Dubai, it is an underdeveloped market, their are just less options.
Why are there less options, because the customers are satisfied with the existing offering or have not been exposed. they like to differentiate themselves with their material consumer consumption but are still lagging in their spiritual consumer consumption. This is not confined to cultural output, let us think of highly capitalistic output such as investor product offerings in the Investment management industry.
If you go to a Lebanon, mainly what you get if you are an investor is a savings account, with some minor access to investor products such as basic online trading, subscription to a classical fund, or some basic discretionary fund.
If you go to Dubai, a touch more developed, you will get something lines of “we are an investment bank, we do asset management, we have a team, we invest in equities, still a very lame or basic approach to investing”.
If you go to London, not only do you get the vortex club in East London dedicated to free improvised music but you also get a CQS. CQS is a hedge fund, a type of investment firm non-existent in shiny Dubai.
This what CQS’s area of activity we are a “credit-focused multi-asset strategy manager” they blend in a Micro fundamental analysis (i.e thorough analysis of a companies income statement, balance sheet, other micro factors such as competitive position, and consequent valuation) with an understanding of the Macro environment in which these asset classes operate: geopolitical, monetary policy, economic growth, employment, and market cycles.
This thorough, thoughtful, and rigorous approach to investing can not exist in a region with lazy numb minds and numb thinking. Their is your difference between underdeveloped and developed. For those unconvinced go visit the website of some regional investment bank and look at the intellectual content available and compare it to what I found deep-diving CQS’ website:
· Investment Approach:
- Fundamental analysis with a macro overlay.
- Rigorous analysis, discipline and hard work, deep dive to generate insights
· Investment Philosophy:
- Open minded, holistic outlook, relish complexity, long term
- Collaborative environment, excellence, high performance, insights, global approach, innovation
· Investment Themes:
o Macro View
- There is High Volatility which presents an opportunity.
- There is dispersion in valuation and idiosyncratic opportunity.
- Belt and road initiative (BRI) $10 trillion: invested in real economy, will stimulate economic growth and is an addition to M1
- Further quantitative tightening in Western economies
- Moderated global growth
- Global trade tensions leading to trade wars
- Upward sloping yield curves implies economic growth
- US IG corporate leverage is up and interest cover is down, but concentrated in specific sectors
- US High Yield (‘HY’) leverage has risen, but interest coverage has remained solid
- In Europe both net leverage and interest cover have been relatively steady. Yields have already risen in anticipation of an end to QE.
- In EU HY, net leverage and interest coverage ratios have improved and we see idiosyncratic opportunity
- Globally Default Rates Likely to Remain Relatively Low
- different regions and countries are at different stages of their economic cycles, yield differentials are growing
- The Fed has finished its QE and is raising rates proactively.
- The ECB is still in QE mode and has signalled it will not raise rates until the end of 2019.
- Japan has suggested it will consider how to gradually normalise monetary conditions within the next few years once inflation has reach the BOJ’s 2% inflation target.
- We are overweight Europe versus the US, and Japan is interesting on a valuation basis.
- Banks’ ability to absorb market volatility has not improved. Add to that an end to asset purchases by central banks. The 800 pound gorilla is leaving the room and the central bank ‘put’ is being removed, and there’s the potential for a liquidity mismatch and that means more volatility
- Major themes you are following: ‘Trump shocks’, European political instability, and China all directly affect the economy and markets
- In 2017, US exports of goods to China were $130 billion while US imports of goods from China were $505 billion
- Fundamental analysis is the bedrock of our investment approach. However, geopolitical risk is having a material effect on markets. One needs to understand the context to determine the transmission mechanisms into the global economy and markets. This in turn helps inform the pricing and timing of risk taking and the trading of geopolitically-inspired volatility. We can also express these views through hedging market directionality and/or buying or selling volatility.
o Micro: Strategic Portfolio Allocation
- CQS is limiting interest rate risk by pursuing long right sized positions in floating rate short duration bonds, duration less than 2 years
- Convertible bonds They provide convexity – upside participation with downside protection, since are linked to Equity
- Favour structured credit, ABS, convertibles and loans.
- In the US, we continue to favour US RMBS opportunities which have been buoyed by a growing economy and a strong housing market.
- In Europe, we have liked European CLOs, reflecting our preference for corporate related risk in Europe over consumer risk.
- We pair some of these exposures with highly convex asymmetric hedges including out-of-the money puts and calls to take advantage of volatility and single name and index relative value trades.
- Idiosyncratic opportunities fallen angels in distressed situations for example restaurants, retail, telecom, financial, and EPC businesses across the capital structure.
· Investment Track Record: Generated a 30% return in 2013, best hedge fund award