Muted Markets on North Korea are a Red Flag to Oaktree's WintrobBy
That risks a ‘big reaction because no one is prepared for it’
European bad loans look attractive; China and India promising
South Korea’s relatively tranquil markets despite the threat from Pyongyang are a sign of complacency, says Jay Wintrob, chief executive officer of Oaktree Capital Management LP, which still has real-estate investments in the country.
While tensions on the peninsula continue to simmer after North Korea talked about a possible preemptive nuclear attack over the weekend, the won advanced the most in two weeks at one point on Monday and government bond yields remained little changed.
The Kospi index also retreated, but that was largely in line with wider Asian equity losses. North Korea’s Foreign Minister Ri Yong Ho later described recent comments by President Donald Trump as tantamount to a declaration of war.
Monday’s muted reaction was a red flag for Los Angeles-based Wintrob.
“Absolutely zero,” he said when asked about North Korea’s market impact during a media briefing in Hong Kong on Monday. From equities to credit, interest rates, default rates and transaction volumes, there is “no sign” that people are concerned about the geopolitical risk, he said. “Which tells me if there is a problem, you have a big reaction because no one is prepared for it.”
North Korea’s limited impact is in line with the broader market, where the borrower-friendly, risk-on environment is pushing debt issuance and asset prices higher, while weakening covenant protections, Wintrob said.
“Everyone is comfortable,” taking risks, he said. Examples of the mismatch between risk and reward include dividend yields in Europe that are higher than junk bond yields, and Argentina’s ability to issue 100-year debt. “That seems odd -- there’s a lot of odd phenomena,” he said.
“We believe in cycles. There will be a part that people call a correction, the problem is I can’t tell you when.”
Here are some of Wintrob’s other views:
- The rapid growth of credit markets in Asia, especially China, presents opportunities to buy into stressed and distressed debt now and -- more significantly -- later in the credit cycle
- European non-performing loans look attractive as central banks have been encouraging banks there to “clean up their act.” Wintrob expects there to be more of this in China and India, and sees good opportunities in bad debt in these countries
- As the level of outstanding debt rises four-fold or five-fold, distressed debt increases by the same amount in a normal cyclical period
Oaktree’s South Korean investments are primarily in property, and big Korean institutions such as pension funds, financials and sovereign wealth funds have put money into its diversified strategies. About $14 billion of the company’s total amount under management of $99 billion as of June comes from Asia-based clients, and $4 billion to $5 billion is invested in the region.