Delivering Alpha live updates: ‘More things will break’ in stock market, economy, top investors say

TCW Group CEO Katie Koch sees a recession coming for the U.S. economy and is encouraging investors to play it safe.

“We are going to have a recession, because that’s the way the world works,” Koch said during the opening Delivering Alpha panel. “We haven’t had a real one for over a decade and a half.”

To combat the slowdown, she recommends a variety of conservative investments, ranging from Treasurys to mortgage-backed securities to cash. “We haven’t seen the pain of higher rates, but it’s coming.”

—Jeff Cox

One reason the Federal Reserve won’t raise interest rates in 2024 is because it won’t want to become a story during an election year, according to Tina Byles Williams, CIO at private equity firm Xponance.

“The Fed is going to stay behind the curve because it doesn’t want to be part of the election narrative,” Williams said at CNBC’s Delivering Alpha conference Thursday.

She noted that the Fed historically hasn’t raised rates within six months of an election.

Fed officials already have indicated that they expect to cut rates by half a percentage point next year. Well-anchored inflation expectations and the presidential race give them further ammunition, said Williams, who thinks the U.S. could enter recession but probably not until “way at the end” of next year.

—Jeff Cox

Returns on private credit look appealing in today’s market, according to Oaktree’s Armen Panossian.

“There’s clearly a need for a replacement source of capital from pension plans, insurance clients, institutions and even retail entering that market,” with the departure of incumbent lenders, said the incoming co-CEO and head of performing credit. “I think the need is quite apparent and the returns are very attractive given the risk.”

— Samantha Subin

Even with the recent decline in stocks, the market has been resilient this year, but two top investing officials say investors should not be complacent when looking at U.S. stock market returns year-to-date. Things are likely to get worse before they get better, and with cash in the bank able to earn 5%, aggressively betting on stocks in the short-term is a mistake.

“We’re more bearish than most people about what lies ahead,” said Katie Koch, TCW President & CEO. “Things break when you reprice aggressively,” she said.

With the Fed raising rates from zero to above 5%, the lag effects of monetary policy on the economy haven’t fully hit yet and the longer it takes for them to hit, the more things that will break, Koch said.

“You’re getting paid to be patient right now,” Koch said. “Cash has a good return.”

Dawn Fitzpatrick, Soros Fund Management CEO & chief investment officer, noted that the hundreds of billions that banks are holding in to-maturity bond portfolios are still holding a lot of pain under the surface that’s being exacerbated by the recent spike in bond rates.

Meanwhile, U.S. consumers have $2 trillion in mortgages that are fixed rate and that means the pain of the interest rate rise isn’t felt as acutely, in real-time, in the U.S. as it is in other markets, where more mortgages are floating rate.

“Everything gets harder from here,” she said.

— Eric Rosenbaum

The U.S. dollar has defied a lot of market pundit calls in the recent past, but with $33 trillion in national debt, and a government debt load that is rising, don’t bet on the currency’s continued strength.

That’s the view of Tina Byles Williams, Xponance founder, CEO, & chief investment officer.

Answering an audience question at Delivering Alpha about the market and economic impact of the rising national debt, she said, “The first victim is the U.S. dollar.”

“People have been saying that and lost money for a while, but it is 21% above purchasing power parity levels,” she said.

“That is the first to me, and most direct asset class victim … and that then has implications on U.S. equities vs non-U.S. equities.”

“I think it’s the primary victim. I can think of others, but that’s the one at the center of the bullseye.”
— Eric Rosenbaum

Remember what happened in retail a decade ago as large swaths of retail properties starting disappearing? That’s going to happen in the office market next.

About a third of the existing supply of office square footage will need to get taken out of the market, led by office properties that aren’t the top tier, TCW CEO and president Katie Koch said.

“We have to give people a reason to come to work and that has to be nice property,” she added.

The debt load in the market will remain under stress as well.

“A trillion and a half dollars of the CMBS market is going to need to be extended in the next about year and a half at four point higher,” Koch said.

Koch, who noted that TCW is both a tenant and investor in downtown Los Angeles, said that it is a “really tough real estate market” for big cites across America, which will lead to that supply getting taken out of the market.

“We’ve had a few people start to walk away from buildings in Los Angeles, San Francisco, other cities,” she said. “It is a long tailed event.”

— Ian Thomas

Even after this year’s run up, artificial intelligence still has more room to run, according to TCW CEO and president Katie Koch.

“We’ve got a long way to go for the story to play out,” Koch said, noting that while all technologies go through hype cycles, AI hasn’t hit its peak just yet.

She called AI a “transformational technology” likening it to mobile phones and one that will determine the winners and losers across sectors.

— Samantha Subin

The 13th annual CNBC Delivering Alpha Investor Summit is taking place at a crucial time for markets as investors grow concerned about a further pullback in stocks. A majority of Wall Street investors haven’t taken solace in stocks’ 2023 gains, thinking the market could retreat further as risk of a recession creeps up, according to the new CNBC Delivering Alpha investor survey. 

We polled about 300 chief investment officers, equity strategists, portfolio managers and CNBC contributors who manage money about where they stood on the markets for the rest of 2023 and beyond. The survey was conducted this week.

More than 60% of respondents believe the stock market’s gain this year has just been a bear market bounce, seeing more trouble ahead. A total of 39% of investors believe we are already in a new bull market.

Asked about the probability of a recession, 41% of survey respondents said they expect one in the middle of 2024, and 23% said a downturn will arrive later than 12 months from now. Only 14% said they don’t expect a recession.

— Yun Li

With yields of 6% available in the bond market, stocks have to do a lot to deliver on a risk-adjusted basis for investors.

They can, according to Ashish Shah, Goldman Sachs Asset Management CIO of public investing, but only for investors willing to look beyond the U.S. market.

Shah sees the setup in the markets as an “interesting buying opportunity” for equities in India and Japan, among other global markets. “Lots of good things are going on across the globe in equities and one of most important things is looking globally,” Shah said in an interview ahead of Delivering Alpha on CNBC’s “Squawk Box.”

How much should investors who buy overseas stocks expect?

“I think you can get 10% in equities, but you have to look internationally,” he said.

The U.S. dollar trend line and the tightness of U.S. balance sheets, combined with bond yields, mean that in the near-term there are headwinds for U.S. dollar-based assets. “It’s a nice setup for cheap assets abroad,” Shah said, point to reflation trades in India, where there considerable investments related to secular trends taking place, and Japan, where diversification of the supply chain is a tailwind.

And where, he said, “valuations are a lot better than in the U.S.”

— Eric Rosenbaum

Kyle Bass, Hayman Capital Management founder and CIO, said investors and companies that are looking to deepen ties with China as opposed to severing them are making “the wrong bet.”

“China’s hooks on Wall Street are so deep into us, all of the big players keep saying we need more integration, not less,” Bass said on “Squawk Box” in an interview on the sidelines of Delivering Alpha. “They’re not interested in our national security, they’re interested in making another dollar, and one day we’re going to wake up and realize that was the wrong bet.”

Bass said that the desire to forge business relationships with China stems from “looking for the cheapest labor, and we’re looking for the cheapest labor with counterparties that are adversarial to our way of life and our values system.”

He called the situation with China a cold war, and said that “we’re not doing a great job but we’re starting to protect ourselves.”

One way Bass says the U.S. should be protecting itself is through an FTC review of TikTok. “TikTok broadcasts straight into our kids’ bedrooms and has never had to obtain an FTC license,” he said.

— Ian Thomas

Les Brun, Ariel Alternatives CEO, says private equity valuations will decline as more companies “run out of cash” and need to complete transactions to fund their growth.

In an interview with CNBC’s “Squawk Box” ahead of the Delivering Alpha summit, Brun said the current situation reminds him of the 2008-2009 period when those in private equity with money were able to make a lot more money, but those holding onto assets that had seen their values drop during the crisis were going to see valuations drop even more because there wasn’t a sufficient pool of buyers. 

The current interest rate environment will add more pressure on valuations.

He said traditional companies are having trouble finding financing at rates that are attractive and transactions have to be completed with either greater amounts of equity or lower valuations. “It has to be one or the other,” he said.

“They will have to find ways to do transactions at valuations that are lower than they expected,” Brun added.

— Eric Rosenbaum

Treasury yields have hit multi-year highs and major stock market averages look poised to cap off a losing September and down quarter. The S&P 500 closed below the 4,300 level for the first time since June earlier this week, while the Dow Jones Industrial Average posted it largest one-day loss since March. Technology stocks have also come under pressure in recent weeks from the threat of rising rates

Comments from Pershing Square’s Bill Ackman later today could play a pivotal role in market sentiment. The renowned billionaire hedge fund manager who’s been a vocal commentator on inflation, the Federal Reserve and the state of the market is slated to speak with CNBC’s Scott Wapner at 4:15 p.m. ET.

— Samantha Subin