Cube Capital’s Scott Gibb sees ‘danger’ argument in favour of long/short, distressed and event driven strategies
Scott Gibb, partner and portfolio manager of Cube Capital, believes that the ongoing investment environment through 2013 will result in significant opportunities for alternative investment managers who can pick out the winners via strategies such as long/short, distressed and event driven.
In early 2012 it might have seemed farfetched to hope for a positive end to the year, given extended turmoil in Europe, US elections and concerns over the subsequent ‘fiscal cliff’ resolution. In hindsight Mario Draghi’s comments to “do whatever it takes” to save the euro, in addition to the resounding assurance that “it will be enough”, acted as a turning point. Despite many sceptics, the comments were effective in reducing extreme tail risk in Europe, so much so that investors are increasingly exiting tail risk strategies and entering risk asset classes.
Whilst the rise in risk assets has not been so extreme as to raise above normal concerns over investor complacency, flows into emerging markets debt and equity have remained strong. In the west, surprisingly, flows into equity turned positive relative to fixed income. Of course, these flows relative to outflows post 2008 are very small. Given this, as well as central banks continued maintenance of ‘cheap money’, there is a compelling case that this trend into equity could continue for some time.
In this environment there is likely to be greater dispersion with big “winners” and “losers” across markets, strategy types, and securities as financing is available, but not uniformly so meaning that some companies can finance very cheaply for longer maturities while others are forced into bankruptcy or restructuring.
As politicians in Europe are increasingly able to manoeuvre with the support of the “Draghi put”, investors should look to take advantage of improving risk sentiment in the form of strategies that benefit from this dispersion including long/short, distressed and event driven. In addition select frontier and emerging markets with superior growth profiles should benefit. We also expect European event-driven, and strategies that benefit from changes in the regulatory regimes will benefit from the improving risk sentiment.
While Europe has stepped back from the cliff, we should not forget that the region remains in recession with Germany still looking to pursue fiscal consolidation in peripheral countries. Add in Italian elections in February (which offer the prospect of Berlusconi returning to power), German elections later in the year and continued stalling on the issue of Eurozone fiscal integration. Europe is far from out of the woods. However, 2012 was the most aggressive year of austerity, meaning most European countries should experience less drag from austerity over the year ahead. With cause for both optimism and caution, it will be an interesting year for risk assets in Europe.
Looking across to the US, we don’t see the market as inexpensive, but do see potential for flows into equity against fixed income. House prices, in particular, appear to have bottomed out, potentially signalling a re-emergence as a growth area. Elsewhere US financials look promising, where large banks have largely recapitalised and smaller/regional banks are facing pressures that might lead to consolidation opportunities.
There remain a strong set of opportunities in Frontier markets, particularly in Africa. This is not just as a commodity play and not just as a beta exposure. In addition to real growth companies, misunderstood and inefficient markets provide significant alpha for nimble investors. Whilst there has been a lot of discussion relating to Africa and frontier markets, we believe investors have yet to commit significant capital to the region. If investors are brave enough to ignore the tendency to invest in the largest and most liquid names, there are significant opportunities to be found.
Interest in China, especially the A share market has been increasing. Towards the end of Q3 last year we felt there was a case for improved optimism in China, as new directives are expected by the new leadership to facilitate growth. Also, given tightening of monetary and fiscal policies to bring down inflation are behind us, and the government has started to increase money and credit supply and restarted some of the mothballed projects and this should push growth in 2013 to exceed the targeted 7-8% range, though we expect the growth impetus to fade by the second half of the year and therefore a tactical approach will be warranted.
Whilst the world looks to have turned a corner at year end, the overall outlook for 2013 is a global economy full of both risks and opportunities. Whilst central banks should cope with tail-risk, there remain significant political risks in the Eurozone. Risk assets are set to have a fascinating year, as investors attempt to discover idiosyncratic opportunities whilst avoiding excessive risks. If the rise in asset prices is not followed by improvements in economic growth then we can expect more risk on/risk off trading, or worse. Opportunities and dangers abound for the markets in 2013.