[Photo by Kim Ho-young]
It is time to prepare a new recession as the prolonged expansion supported by ultra-easy monetary policies is near to an end, said Yoon Jae-sung, chief investment officer at New York Life Investment Management LLC.
“Global monetary authorities were meant to be the lenders of last resort, however, they have unwittingly become an agent of Minsky instability,” Yoon said in a keynote speech at Global Alternative Investment Insights 2019 conference hosted jointly by Maeil Business Newspaper and European Chamber of Commerce in Korea on Thursday in Seoul. “The prolonged expansion from ultra-easy monetary policy and stable low economic growth has led to unstable practices in the hunt for yield and return.”
He warned of the so-called “Minsky” moment, referring to the period when a market falls into crisis after extended stability. Lenders will tighten credit availability to even good companies in such time, creating dislocation in overall investment system, he added.
Yoon reminded that economic downturns cannot be avoided but happen naturally as driven by extended period of stability. But central banks around the world have been over-encouraging borrowers and lenders, and as a result, public and private markets have become progressively risky.
Yoon noted that corporate leveraged buyout (LBOs) are at an all-time high of 11 times earnings before interest, taxes, depreciation, and amortization (EBITDA), and approximately $2.5 trillion in high yield bonds and leveraged loans are due over the next five years.
But the world’s monetary policy has reversed from tightening to easing this year in pursuit of stability amid growing uncertainties over the global economy due to the continued trade tensions between the world’s two biggest economies, the U.S. and China and the delayed Brexit.
“Renewed stability has shifted my expectations,” Yoon said. “What I thought was a reasonable assumption for a recession in the first half of 2020 now looks diminished and delayed” to the latter half of 2020.
[Photo by Kim Ho-young]
But investors who prepare an economic burst would feel less pain, he said, recommending to avoid high-risk vehicles but seek for investments in those with “higher quality and shorter duration with a proven track record.” He expected the Minsky moment would give opportunities to those with capital as many assets are generally sold at discounts in such time.
Other experts who attended the conference echoed Yoon’s view.
Kim Sung-joo, chairman and chief executive of National Pension Service, said in his welcoming remarks that it is becoming more difficult to expect excess gains from traditional assets such as equities and bonds in a low-interest and low-growth era. Competition has enhanced in the alternative investment environment as well, he said.
Kim warned that the global economy might have already entered into the New Abnormal age as the global investment environment has become more complex with more fluctuation, increasing uncertainties.
*Minsky moment refers to a period of time when the financial system falls into crisis after a bullish economic period extended by excessively mounting debt as compared to growth. Debtors’ ability to repay debt deteriorates, leading them to sell even healthy assets. The term is coined after American economic Hyman Minsky (1919-1996) and has received attention after the 2008 financial crisis.
By Cho Si-young and Lee Eun-joo
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