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CQS Insights

Mid-Year Review 2016

In this Q&A, Sir Michael Hintze, Chief Executive and Senior Investment Officer of CQS, presents an update on the risks and opportunities he sees in markets in 2016 and beyond.

Q: It has been a decent first half in performance terms for CQS in what is proving to be a volatile and challenging year for markets thus far. At the end of 2015 you expressed caution. Are you still concerned?

A: I continue to be cautious and mindful of

‘potholes’. There are uncertainties created by global geopolitical turbulence, rising populism, and political uncertainty in the US ahead of November’s Presidential elections. In Europe, the UK voted to leave the European Union (EU). Looking into 2017, there is a pretty heavy electoral calendar in Europe, including German parliamentary and French presidential elections, as well as Czech, Hungarian and Norwegian elections, all of which are likely to add to the debate around what kind of Europe EU citizens want. Across Asia, the macroeconomic picture is weaker. China’s growth rate is moderating and its economic structural adjustment is ongoing, while the government has to balance concerns around possible unemployment, social unrest, rising debt levels, forex outflows, and tension around maritime issues. In Japan, Prime Minister Abe received a resounding new political mandate, but growth remains constrained by an economy and stock market that have been slow to respond to progressive monetary easing. It now looks like Japan’s government will undertake further fiscal policy responses to stimulate the economy. In contrast, the US economy appears to continue to grow, labour markets are tightening and the Fed is considering a more hawkish monetary policy.

Offsetting geopolitical and economic uncertainty from a market perspective is that monetary policy, particularly Quantitative Easing (QE), is supportive of valuations, especially in developed markets. Emerging markets (EM) have benefited and while it has not been drained from the system, in the absence of renewed stimulus, its effect on EM appears to be diminishing. Add to that, the US dollar has shown renewed strength of late. Credit easing in China and QE from Japan and other parts of Asia clearly helps, but it is not as universally supportive as US QE.

With the world’s major economies slowing, central banks globally are likely to err on the side of caution and monetary policies should generally continue to be supportive.

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INFORMING THE HEDGE FUND COMMUNITY With access to some of the industry’s biggest names and an astute and talented group of writers and contributors, The Hedge Fund Journal has established itself as a trusted source of information on the hedge fund industry.