JANA Annual Conference Session Summary – Keynote 1: Navigating the Sea Change

Setting the Stage for Change

The JANA Annual Conference 2024, themed “From Tensions to Transformation: Geopolitics, Economics and Sustainable Investing”, brought together global leaders and experts to provide exclusive access to discuss the pressing challenges and opportunities investors face in a rapidly evolving financial landscape. One of the event’s most anticipated sessions was the keynote address by Howard Marks, Co-Founder and Co-Chairman of Oaktree Capital, who provided a compelling perspective on the ‘sea change’ in monetary policy and its implications for investment strategy.

As the financial world undergoes what Marks describes as a “fundamental, significant, and presumably lasting transformation,” it’s clear that investors must recalibrate their strategies to adapt to a new era of higher interest rates and shifting market dynamics.

The End of Low Interest Rates: A Fundamental Shift

Howard Marks began his keynote address by stressing that the current shift in monetary policy is not a mere market fluctuation but a ‘sea change’—something he views as a ‘fundamental, significant, and presumably, lasting transformation’ in the financial environment.

Marks underscored the importance of this ‘sea change’ moment for investors, noting, ‘Just so you know, this is the only macro call I’ve ever made in my life. I attach a lot of importance to this.’

He observed that for more than 40 years interest rates have steadily declined, creating an environment that many investors have come to regard as ‘normal.’ Marks reflected on the profound impact of this period, particularly in its ability to stimulate the economy, inflate asset prices, and reduce the cost of capital, making ‘default and bankruptcy easy to avoid.’

‘Nobody in the business today has ever seen anything other than declining rates or ultra-low interest rates,’ he said. ‘This has had a profound impact on many things.’

The Era of Low Interest Rates is Over

Marks emphasised that this prolonged period of declining rates, which began in the early 1980s, is now firmly in the past. Interest rates were kept exceptionally low from 2009 through to 2021, with the US Federal Reserve (Fed) funds rate averaging just 0.5%. This era, which produced the longest economic recovery and bull market in US history, created what Marks called an ‘easy period’ for many investors, particularly asset owners and borrowers.

However, Marks was unequivocal in his message that this environment is no longer in play: ‘My message is to reiterate that it’s over,’ he said.

Drawing on an analogy from his annual travel through the Middle East and Asia, Marks compared the era of low rates to a ‘moving walkway at the airport’ that allowed investors to make extraordinary progress without much effort. ‘There’s an old saying: never confuse brains with a bull market,’ Marks quipped, adding that many investors benefitted from low rates more than from exceptional skill.

The Rise of Interest Rates: A New Normal

Marks discussed the significant rise in interest rates that has taken place since the pandemic, with the Fed funds rate now sitting at 5.25-5.5%. This, according to Marks, is another emergency measure — this time designed to curb inflation rather than stimulate growth. ‘The emergency, I think, is over,’ he said, adding, ‘I think the Fed will back off from the emergency rate of 5.25-5.5% and eventually lower rates to around 3%, he warned that investors should not expect a return to the ultra-low rates of the last 40 years: ‘We’re not going back to zero or a half or one.’

This shift, Marks argued, signals a return to more normal economic conditions. ‘The norm is that when you live through something for a long period of time, you tend to think that’s normal,’ he said. He predicted that debt markets, in particular, will return to their long-term averages, with higher default rates and more cyclical recessions likely. ‘It’s been 15 years since we had a real recession,’ Marks pointed out. ‘We really haven’t had a bear market of consequence in 15 years.’

Implications for Investors: Debt deserves a place

As part of this new normal, Marks urged investors to rethink their approach to debt and credit. While equities and leveraged strategies thrived during the era of low interest rates, Mr. Marks argued that debt is poised to play a more significant role going forward. ‘Leverage strategies won’t work as well,’ he said. ‘Equities probably won’t do as well. Debt won’t do quite as badly.’

Today’s market offers attractive returns on debt instruments, particularly in liquid credit and private credit, he said, which are now delivering returns comparable to equities. Marks noted that liquid credit is currently yielding 7-8%, while private credit is returning low double-digits. He emphasised that these returns are not only competitive with historical equity returns but also more dependable. ‘They are quite sufficient for most clients’ needs, and most importantly, they can be earned dependably,’ he said.

For Marks, the key question for professional investors is whether they prefer higher expected returns with a wide range of possible outcomes, or slightly lower returns with more predictability. He argued that debt can serve as a ‘bedrock foundation’ for portfolios, offering reliable returns in an environment where equities may no longer outperform. ‘Debt or credit deserves a place in most portfolios,’ Marks concluded. ‘And this wasn’t true five years ago, or 10 years ago, or 15 years ago, and it’s true today.’

Key Takeaways: Adapting to the New Financial Era

In his address, Marks emphasised several key points for investors to consider moving forward:

• The End of Low Interest Rates: The era of ultra-low interest rates, which shaped the financial landscape for over 40 years, is over. Investors need to recognise that this change is not temporary but a permanent shift toward a new norm.
• Debt Deserves Renewed Attention: With interest rates rising, debt instruments now offer more attractive and dependable returns. Marks encouraged investors to reconsider the role of debt in their portfolios, particularly in liquid and private credit.
• Rethinking Equity Strategies: Equities, which thrived in a low-rate environment, may no longer deliver the outsized returns of the past. Investors must weigh the trade-off between potentially higher but volatile returns from equities and more predictable returns from debt.

Conclusion: A Time for Change

In closing, Howard Marks encouraged investors to acknowledge the changing environment and ensure client portfolios adjust accordingly. Quoting the economist Paul Samuelson, he said, ‘When events change, I change my mind. What do you do?’ Marks challenged the audience to reflect on whether they agree that the investment environment has shifted radically. If so, he asked, ‘What will you do about it?’ For Howard Marks, the answer is clear: the era of low interest rates is over, and debt deserves a renewed place in investment portfolios.

Looking Forward: JANA’s Approach to Navigating the Change

At JANA, we recognise that the financial environment is shifting dramatically, and we are committed to helping our clients navigate these changes. As a trusted investment partner, we are refining our strategies and services to ensure our clients’ portfolios are well-positioned for this new era.

Moving forward, our key priorities include continuing to focus on debt opportunities to capitalise on the stable and attractive returns these instruments offer in the current market, while offering guidance that aligns with each client’s unique needs to support the navigation of and adjustment of investment strategies to the evolving financial landscape.

By staying attuned to the ‘sea change’ and working closely with our clients, JANA aims to ensure that investment objectives are met, even in this new, more challenging environment.