Developments and trends influencing market approaches.
By Ed McCarthy
Amit Prakash, Chief Investment Strategy Officer with Alberta Investment Management Corporation (AIMCo) in Edmonton, Alberta, will be a participant in the upcoming CAiP Virtual Forum on Private Capital (Debt and Equity) Fireside Chat on March 25. CAiP recently asked Mr. Prakash for a preview of his thoughts on the current economic environment and how it is influencing AIMCo’s approach to the markets.
CAiP: What developments and trends are you monitoring, both in Canada and globally?
Amit Prakash
Amit Prakash: One of the most significant events, not surprisingly, has been the pandemic, which in some instances has accelerated certain trends and in other cases impacted certain trends that will stay with us for a while. In particular, the response of the central banks and governments across the globe has meant that the fiscal largesse and the monetary easing that the pandemic triggered will cast a shadow over us and the economies for years to come.
We’re beginning to see some of the initial impact clearly on some of the sectors that were badly hurt. Outside of that, you’re starting to see some of that impact in inflationary expectations and interest rates movements near-term.
However, over the longer horizon, some of the other things that we’re also looking at include opportunities that the dislocation in the market has offered such as senior secured loans, COV19 resistant borrowers; secondary public or private loans that are trading at discount due to market liquidity, etc. We’re also casting an eye at opportunities globally rather than simply domestically in Canada.
CAiP: When you’re looking at North America, do you tend to view it as a whole or do you also break down U.S. and Canada opportunities?
Prakash: We look at it both ways. What I mean by that is if you think about clients’ investment objectives, they typically seek both alpha or value-add and beta or market exposure.
Many of our clients, not surprisingly, have Canadian equity benchmarks as a beta exposure. So, from that perspective, it is quite relevant and important for us to approach each of the markets using a beta lens.
However, from an alpha perspective, we are somewhat agnostic of the geographic boundaries as we explore alpha opportunities. And for that we look at all of North America and the world, if you will, rather than necessarily restricting ourselves by geographies.
CAiP: Are there any particular opportunities or concerns, both mid-term and longer term, that you have that could change your outlook?
Prakash: We believe that over the near- to medium term the interest rate curve may potentially push both higher and steeper in Canada. That suggests to us that clients have to be careful when looking at fixed income investments to ensure that they are the right types of investments with the appropriate level of duration with the appropriate level of credit exposure built into it.
One of the areas we think is quite attractive from that perspective is the private debt and loan space. Even if one makes conservative assumptions on defaults and loan losses, given the expected yield pickup, that space still looks quite attractive.
In a similar way, private equity looks quite attractive relative to public equities in that they weren’t negatively impacted as much by the pandemic on the valuations, both due to the lag in the mark-to-market, as well as less frothy valuations to begin with. One of the industry data points we look at suggests that the weighted net multiples for private equity have been falling over the last couple of years. That further helps in having a positive outlook for private equity.
On the flip side, the public equities have rallied quite strongly since March last year, so as we look forward, we certainly are at a higher starting point on valuations. While the risk assets are still attractive, public equity has a bit of a headwind, given their starting valuation levels relative to that for private equities.
Ed McCarthy is a longtime financial writer and author of three books, including “Foundations of Computational Finance with MATLAB.”
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To learn more about developments in the Canadian pension industry, register now for the upcoming March 25 CAiP Virtual Forum on Private Capital (Debt and Equity).
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