A top hedge fund manager in Canada says the coronavirus sell-off is a temporary setback that will soon give way to an economic rebound, sending stocks and interest rates higher.
“While there will certainly be an economic hit from the virus, when you go back through these ‘pandemic’ periods of time, there’s really, without exception, a fairly significant recovery that takes place in markets and economies,” David Picton, founder of hedge fund Picton Mahoney Asset Management, said during an interview at Bloomberg’s office in Toronto.
The U.S. Federal Reserve delivered an emergency half-percentage point rate cut Tuesday, a dramatic signal that policy makers are growing more worried about the economic threat from the virus. Stocks dropped while the 10-year Treasury yield fell below 1%.
Bank of America has predicted that the global economy will see its weakest year since the financial crisis as the virus damages demand in China and beyond. Futures markets predict more rate cuts, with the Bank of Canada likely to lower its benchmark rate on Wednesday morning.
But Picton sees higher rates down the road. He acknowledges that there will be a “significant interruption” to the global economy, but is convinced it will end quickly and there will be a V-shaped recovery later in the year.
The headwinds of the recent past -- a trade war, tighter monetary policy in the U.S. and a lack of significant Chinese stimulus -- have shifted as policy makers react to the virus threat, he said. When the outbreak subsides, there will be pent-up demand globally for goods and services, he added.
That is likely to be a powerful recipe for a move higher in most risk assets, including global equities, Picton said.
“The coronavirus might have just delayed a powerful recovery phase that was beginning to develop,” he said. “And then I think there will be a stimulus response that builds an even greater tailwind.”
Picton Mahoney was one of the earlier entrants into the hedge fund market in Canada. One of the firm’s oldest funds, a long-short equity fund, returned 8.25% annualized since inception as of Jan. 31, outpacing the S&P/TSX Composite Total Return Index by more than two percentage points.
Picton sees parallels between the current environment and the late 1990s. Back then, a period of turmoil -- the Asian crisis and Russian default of 1997-98 -- forced central banks to reverse course on a round of tightening.
After the Fed cut in 1998, interest rates began rising again in 1999 as the global economy regained speed. Picton thinks the same thing will happen again.
That means interest-rate sensitive investments will underperform as the recovery takes hold, said Picton, whose firm has about C$7.5 billion ($5.6-billion) in assets under management. The firm is shorting some rate-sensitive securities and buying derivatives that will pay off if rates go back up.
And if its is indeed the late 1990s all over again, how else should investors play it?
“The very simple answer is, take risk across all asset classes, understanding that you’re probably in a giant poker game against everybody else who’s doing the exact same thing,” he said.
For Picton, the sharp gains in government bonds is overdone and the correction in risk assets, especially in high-yield debt, is reflecting a near-term outlook of negative economic data.
There is “so much of a narrative that rates will not go up again that the bond market is somewhat missing on the plain signals that would have been picked up in the past,” he said. “I don’t believe that the bond market’s going to get it right this time, like they did back in 2008 in the last recessionary phase.”
One of his top picks is First Quantum Minerals Ltd., which has started the world’s largest copper mine in the Panamanian jungle, in an environment where supply is probably less than demand growth, according to Picton.
“Inventory’s already low and more importantly there’s no new projects that you can see on the horizon,” he said.
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