The credit cycle is close to the end. Risky assets, including credits, are vulnerable. Central banks risk falling behind the curve. Sander Bus and Victor Verberk, co-heads of the Credit team, are becoming more careful. They prefer safety and stay up in quality to benefit from further decompression and higher risk premiums.
The global economy delivers another good quarter in terms of growth. It even seems that capital investments are finally contributing to growth. “This has been the main disappointing economic variable to date in this business cycle,” says Victor Verberk. “Moreover, it looks like the different economic blocs have synchronized their cycles,” Sander Bus adds. “Except for China, all of them are showing an upturn. Chinese credit to GDP has reached levels we last saw in crisis situations in countries such as Korea, Japan and Thailand.”
Verberk and Bus highlight a topic that is in sharp contrast with the last two years: the risk of central banks falling behind the curve. “The biggest question mark in this cycle is why inflation is so low,” says Verberk. “Considering the reduction of the economic output gap, we could expect some inflation scare soon at central banks. We believe inflation might be at a secular turning point.”
In any case, all central banks combined will massively reduce monetary stimulus during 2018. “The only thing that would keep us from expecting increased market volatility,” says Bus, “is a scenario in which other market participants, such as commercial and retail banks, take over the purchasing of fixed income assets. In our view, the numbers are too large to expect such a perfect scenario. All this holds for all risky asset classes.”
Once in a while, Verberk and Bus take a helicopter view. “We try to think outside the box, outside this economic cycle with all daily noise influencing us,” says Verberk. “Guess what, that does not make us more relaxed. Ever since we abandoned the Bretton Woods system in the 1970s, we actually created fiat money, leaving it fully in the hands of central banks and politicians. This has created an ever increasing amount of financial shocks. Central banks managed by academics, overestimating themselves and the control they have on an economy, solve economic problems with lower interest rates.”
In Bus’ view, central banks have been right for the wrong reasons in their loose monetary policies. “A massive labor supply shock of over one billion Chinese entering the labor force since the 1980s has been disinflationary. This created the debt super cycle we started writing about ten years ago. Solving debt issues with more debt will eventually create more rather than fewer financial shocks. We live in an era in which we should expect a regular cycle of crisis, releveraging, boom, excesses and bust again.”
“Just by studying economic history and organizing this Credit Quarterly Outlook,” Verberk remarks, “we as a credit team have created a certain degree of understanding of the events around us. That is why we call this outlook a love letter to economic history. We keep informing our clients in an honest way about our views on the credit cycle, even when we think it is close to the end. And now risky assets are vulnerable, maybe even more so than government bonds.”
Despite the fact that fundamentals are improving in economic terms, Verberk and Bus are becoming more careful. “Asset price corrections do not always require a recession,” Bus warns. “There are some extreme things we worry about. When five FAANG stocks drive up the S&P 500 index by over 20%, when inflation is so low even though unemployment tells you different and when credit markets face a net selling system of central banks, beta positioning should be careful. Then we are well positioned to benefit from the volatility that is to come. The opportunity loss of not owning enough beta exposure is just too low.”
“It is darkest before dawn but all looks bright before darkness too,” Verberk adds. “Remember 2007. Since then debt levels and dependence on low interest rates have increased ever more. We just need some kind of shock to reprice risky assets. It has happened so many times before, and it will again. This is the lesson history teaches us. We live in an era of financial shocks based on too much debt and overconfident central bankers.”
The content displayed on this website is exclusively directed at qualified investors, as defined in the swiss collective investment schemes act of 23 june 2006 ("cisa") and its implementing ordinance, or at “independent asset managers” which meet additional requirements as set out below. Qualified investors are in particular regulated financial intermediaries such as banks, securities dealers, fund management companies and asset managers of collective investment schemes and central banks, regulated insurance companies, public entities and retirement benefits institutions with professional treasury or companies with professional treasury.
The contents, however, are not intended for non-qualified investors. By clicking "I agree" below, you confirm and acknowledge that you act in your capacity as qualified investor pursuant to CISA or as an “independent asset manager” who meets the additional requirements set out hereafter. In the event that you are an "independent asset manager" who meets all the requirements set out in Art. 3 para. 2 let. c) CISA in conjunction with Art. 3 CISO, by clicking "I Agree" below you confirm that you will use the content of this website only for those of your clients which are qualified investors pursuant to CISA.
Representative in Switzerland of the foreign funds registered with the Swiss Financial Market Supervisory Authority ("FINMA") for distribution in or from Switzerland to non-qualified investors is ACOLIN Fund Services AG, Affolternstrasse 56, 8050 Zürich, and the paying agent is UBS Switzerland AG, Bahnhofstrasse 45, 8001 Zürich. Please consult www.finma.ch for a list of FINMA registered funds.
Neither information nor any opinion expressed on the website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco/RobecoSAM AG product should only be made after reading the related legal documents such as management regulations, articles of association, prospectuses, key investor information documents and annual and semi-annual reports, which can be all be obtained free of charge at this website, at the registered seat of the representative in Switzerland, as well as at the Robeco/RobecoSAM AG offices in each country where Robeco has a presence. In respect of the funds distributed in Switzerland, the place of performance and jurisdiction is the registered office of the representative in Switzerland.
This website is not directed to any person in any jurisdiction where, by reason of that person's nationality, residence or otherwise, the publication or availability of this website is prohibited. Persons in respect of whom such prohibitions apply must not access this website.