3R's Seth on Credit Markets, Investments

Bloomberg

Watch 3R's Seth on Credit Markets, Investments - Bloomberg on Dailymotion

Transcript

00:00We're seeing such dramatic reversal in risk assets.

00:02I'm just wondering, how are you thinking about year-end

00:05and the volatility that we're seeing right now?

00:07So I do think we are, what we are seeing is a mid-cycle correction

00:11and to some extent markets hitting an air pocket.

00:14I don't think it's a turn in the cycle.

00:15I don't think we entered a bear market completely,

00:18but the correction is healthy.

00:20I do think we will see potentially the wall to stay high

00:23as we go into the year-end

00:24because there are a lot of factors coming into play.

00:26You have the Fed cut, you have the Fed chair announcement,

00:29you have the question around the Fed independence,

00:32you'll have BOJ coming back in equation,

00:34and you have weaker China data.

00:35So the confluence of factors, I do think we'll see more wall

00:38as we go into the year-end.

00:40In terms of the market mechanics,

00:42some people have pointed to maybe some underlying liquidity issues.

00:45Are you seeing any material science,

00:47or what should we be watching to just understand financial conditions right now,

00:51which could be tightening?

00:52So I think you've seen for the first time, in fact, in SAP,

00:55a little bit of tightening of financial conditions,

00:57and what you do need to watch are the correlations.

01:00You've seen a little bit of that breaking of correlations.

01:02If you look at last week, week and a half,

01:04you saw the Treasury selling off, you saw gold down,

01:08you saw obviously dollar with a little bit of a strength,

01:10the risk of currencies didn't really perform,

01:13and you have seen those correlations,

01:15not exactly what you would expect in a normal functioning market.

01:18How should I be looking at credit stress next year then,

01:22given all the factors that you highlighted there?

01:24Are we certain signs of credit stress really picking up next year?

01:27So some signs, but I wouldn't say it's broad-based.

01:30I would highlight two pockets.

01:31You would see that.

01:33First is in terms of all the AI spend,

01:36you're seeing some of that credit spreads

01:38actually showing meaningful move,

01:40even though from a very low base.

01:42And the second area, which will remain in focus,

01:44in my view, is private credit,

01:46where we've seen a significant growth.

01:47We had a few cases of the defaults

01:50over the course of the last few months.

01:51I think there's more to come there,

01:53but I can't see a systemic risk emerging from credit stress.

01:56But I do see the credit spread in general widening

02:00going into next year.

02:01Can we still at least expect the Fed to come in early

02:03in the event we get a more meaningful,

02:05if we get a more meaningful sign

02:07that credit stress might be starting to?

02:09I think the bar will be high for the Fed to jump in.

02:12Now, if you look back in the last 20 years,

02:14I can look back at 2008 crisis,

02:16and you had 2020 COVID,

02:17where you had the Fed coming in

02:19and providing support for credit,

02:21not just for the functioning of Treasury market.

02:23But that bar, in my mind, is high.

02:25So a small amount of stress and widening

02:27and some defaults,

02:28I don't think the Fed jumps in.

02:30You mentioned about the AI risk in credit markets.

02:33I mean, they're raising a lot of money out there.

02:36Yeah.

02:36Do these numbers shock you in any way?

02:38The numbers almost get to a point of being surreal.

02:43Because end of the day,

02:44the question always comes as an investor

02:46is the return on investment.

02:48And where is the investment return going to come from?

02:50It's a bit unclear.

02:51And the markets are getting somewhat nervous,

02:54trying to understand where is that return

02:56on the productivity boost going to show up.

02:59Now, the challenge I can see is,

03:01like any other technology shift

03:03that we have seen in history,

03:05not investing is not an option for the large players.

03:07So hence, this race is going to continue.

03:10And you will get winners and losers in the whole race.

03:14And the credit spreads will keep reflecting that as you go.

03:17Do you think we'll get meaningfully more supply

03:20in credit next year on the back of just the...

03:23I do think so.

03:23If you look at the infrastructure boom around that,

03:26data centers, power, everything that's required,

03:28I do think you would need to be able to fund it.

03:30And now at this point,

03:31you've seen that crossover

03:32where the funding requirements are much above

03:35the free cash flow from a lot of the large AI investors.

03:38Already.

03:39And they have a substantial amount of free cash flow.

03:41Yeah.

03:42Where are you seeing...

03:43Is there a good barometer of AI risk

03:45in the credit markets right now?

03:46People are talking about these credit default swaps

03:48around Oracle, for example,

03:49as sort of something...

03:50Are you finding those sort of pockets, I guess, of stress?

03:54I think the pockets are not really that clear.

03:57Oracle, obviously, is a little more visible

03:59because it's more crossover

04:00than the very highly rated larger cap names.

04:04But where I think the credit spreads will show up

04:06in terms of the reflection

04:08is as you see some defaults or challenges

04:10picking up as you go into next year.

04:12But I don't think we have seen that much as yet.

04:14The credit expansion on the back of AI

04:16is in the early stages.

04:17I want to ask you about the inflation

04:21and the tariff-induced inflation

04:22that I think if you were at some of the sessions,

04:24I think Gina Raimondo talked about.

04:26You know, it's very difficult to reverse tariffs

04:30that are already in place.

04:31She said she spent hours in the Oval Office

04:33talking to Biden, convincing him,

04:35can you take down some of the tariffs?

04:36And they tend to be sticky.

04:37And the reason I say that is now

04:39we've yet to really see the pass-through

04:42from the large corporates in terms of inflation.

04:44Is that something we should expect next year?

04:46I certainly think we should expect that.

04:48There was a lot of front-loading.

04:50There was a lot of inventory bills.

04:51There's certainly a lot of absorption

04:52of the cost increase

04:53by both the seller and the buyer.

04:56The pass-through has started, in my view,

04:58and we'll see a continuation of that pass-through

05:01that will play through the CPI data in next year.

05:03I think the bigger question for the Fed

05:05will be the tariff-induced inflation.

05:08Do they try to look through it?

05:11Versus the services inflation,

05:13which is more sticky,

05:14which is certainly a bigger headache

05:15for the Fed at this point.

05:18In terms of just the private credit space

05:21that you talked about,

05:22I mean, everyone seems to be piling

05:23into private credit these days.

05:25Are there risks that maybe investors don't know

05:27about really something

05:28that is a little bit more opaque

05:29than maybe public markets are?

05:31I think the part which obviously

05:32is challenging for a lot of investors,

05:35it is a market which is not very transparent, right?

05:37There's no mark-to-market on a regular basis.

05:40There's no active trading,

05:41so you don't have a price discovery.

05:43The challenges that you would see

05:45is as the underlying businesses,

05:47specifically the smaller businesses

05:48or the buyouts which were actually financed

05:50through the private credit markets,

05:52as those businesses slow down

05:54because of high rates,

05:55the tariff impact,

05:56the shift in supply chains,

05:59end-of-the-day credit is credit.

06:00It goes through a cycle,

06:01and the biggest risk in credit is default.

06:03And I think that becomes very binary,

06:05and you will not find out

06:07until it gets there.

06:09Tell us about this new fund

06:10that you're fundraising, of course.

06:12You've helped, speaking of private credit,

06:14helped build, of course,

06:15a franchise of private credit

06:16in your previous house.

06:17What strategies are you looking at?

06:19What looks mispriced as you launch?

06:21So at this point,

06:22first of all,

06:23the strategy is very much focused

06:24around multi-strategy credit,

06:26so across the credit spectrum

06:27in terms of liquidity,

06:28country, currencies,

06:30and looking at allocating capital

06:32where you see mispricings.

06:34Right now, if I look at credit

06:35in most parts of the public markets,

06:37it looks fairly too rich

06:38in terms of pricing,

06:40which means you're not going to lean

06:41too long in these markets.

06:44These are the points in time

06:45where having the tail risk hedges

06:47and some downside protection

06:49becomes critical,

06:51private credit as a space

06:52from a secular perspective,

06:53I still think has a long runway.

06:55But from a cyclical standpoint,

06:57next one or two years can be tough.

06:59You're seeking to raise

07:00about $700 million.

07:02How is that going so far for you?

07:03It's going well.

07:04It's very well on the way.

07:05I think the idea is to obviously

07:07start small sometime

07:08in the course of next few weeks.

07:10And then it's an open-ended structure

07:12which actually gives you the runway

07:13to raise over the next few years.

07:15So I'm in no rush.

07:17I think the market is coming your way

07:18in terms of opportunity

07:19and you actually want to grow alongside.

07:21you

Category

Transcript

Be the first to comment

Recommended