We thought it would be interesting to issue our first blog with a question we received from an allocator. The question concerned how we compare the current crisis to the one in 2000 and 2008, and what data sources we use to construct our view on the cycle.
What we always aim to do is go back to the source. Our team does continuous work to understand central bank policy, government support programs through reading public statements such as the US care act, the evolution of ECB balance sheet and asset sheet purchases in their various programs. We understand well that some of these programs may not be efficiently implemented and that things can rapidly change.
Second, and this is harder to replicate for non-active market participants and allocators, we receive a lot of information by being active in the markets. As we do our analysis, determine our target entry price and go to the market, we receive feedback on how our view compares to other market participants, and what bid/ask spreads are. These activities provide an indication of whether people are eager to allocate or whether risk aversion dominates. Doing this each day may provides an indication of a (short term) trend.
Third, we realize that there are elements that we can analyse and predict with a certain degree of confidence but many that we cannot. It is interesting to link this to previous crises – one thing that we have learned is that one will not have all elements and means to construct a fully waterproof prediction, but have to construct a hypothesis to benefit from dislocations. One such hypothesis today is that the time to recovery (of asset prices) might be shorter in credit than it has been in past crises, and therefore one has to move slightly faster when a dislocation occurs. At the same time, we believe that quite some asset disposals in credit may still have to take place as investors face margin calls, credit migration makes it difficult to hold certain assets or because investment funds face redemptions.
Another element, again referring to previous crises, is that we believe the support programs and responses to this crisis are quite different from 2000, and in particular to 2008. For starters, it is not a banking crisis or financial crisis. Banks are “spared” slightly more by the regulator (some reference sources are mentioned in Astra’s “Credit update presentation’’ – please ask our IR for a copy if you are interested). Our explanation for this is that the proper functioning of banks is crucial for them to be a reliable conduit of lending. Many support programs are targeted on the consumer and large corporates. Again, actions, statements, and public balance sheets are a good source of information.
Fifth and last is to ask the question how and what other allocators are doing. There is a lot of capital raised for corporate distressed opportunities. In our experience, bankruptcies happen with a lag to economic weakening. One can look at the distressed indices for reference. Distressed investing is a process driven strategy; restructuring a company takes time. It generally does not pay to be the first mover. Astra’s view is that the attractive part of the markets is found in higher quality credit assets that have technical dislocations because of market dynamics. They may have some uncertainties, but if one can make a double-digit IRR on a high-quality credit asset with high degree of confidence, then that obviously is very attractive.