'Wall Street Legend' Howard Marks: "End of Low Interest Rate Era... Increase Bond Investments Instead of Stocks" [Interview]

The Era of Ultra-Low Interest Rates Ends,
Arrival of the 'Sea Change' Era
"S&P 500's Expected 10-Year Annual Return at 2%"
Advises Expanding Investments in Bonds Such as High-Yield
U.S. Risk Lies in Fiscal Deficit... "Unlimited Credit Card Spending"
"South Korea Expected to Overcome Political Turmoil... Will Buy Undervalued Companies"

"The 40-year trend of falling interest rates and the era of ultra-low interest rates have come to an end. While the U.S. stock market cannot be considered a bubble, the expected returns over the next 10 years are only up to 2% annually, making it advantageous to increase the proportion of safe asset investments such as bonds rather than stocks."

Legendary American value investor Howard Marks, chairman of Oaktree Capital Management, is conducting an interview with the Korean correspondents in Manhattan, New York, on the 24th of last month (local time).

Howard Marks, the legendary value investor and chairman of Oaktree Capital Management in the U.S., stated in an interview with Korean correspondents held in Manhattan, New York on the 24th of last month (local time), "Currently, investors are optimistic about the stock market, but historically, high valuations may limit returns," he said.

Marks is a legendary Wall Street investor who gained great fame by predicting the collapse of the 'dot-com bubble' in the early 2000s. His investment memos are considered essential reading on Wall Street, with Warren Buffett, the 'investment genius' and chairman of Berkshire Hathaway, regularly reading them.

Marks said, "Given that the current price-to-earnings ratio (PER) of the S&P 500 index is around 22 times, the historical expected annual return over the next 10 years will be between -2% and 2%. While there is no need to leave the market, if you want to reduce risk, you should consider reducing the proportion of aggressive assets in your investment portfolio," he advised.

He also predicted that the U.S. Federal Reserve (Fed), which temporarily paused its monetary easing cycle last month, will slow the pace of interest rate cuts this year. The Fed began cutting rates in September last year, lowering the benchmark rate from a peak of 4.25-4.5% by 1 percentage point over three consecutive cuts, and then held rates steady for the first time on the 29th of last month.

Marks said, "Although inflation is approaching the 2% target, the final phase will not be easy," and predicted, "The Fed may cut rates a few times this year, but it will be difficult to have as many cuts as the market expects." However, he added, "Unless inflation surges again, there is no reason for the Fed to raise rates," indicating a low possibility of resuming rate hikes.

Legendary American value investor Howard Marks, Chairman of Oaktree Capital Management, is conducting an interview with the Korean correspondents in Manhattan, New York, on the 24th of last month (local time).

He diagnosed that the current financial market has entered an era of 'Sea Change,' meaning the end of the low-interest-rate era and a transition to a new interest rate environment.

Marks said, "For the past 40 years, falling interest rates have continuously driven economic growth and asset price increases, but that trend has now ended," and forecasted, "The ultra-low interest rate era like 2009-2021 will not return." He explained that while personal loan rates reached 22.25% in 1980, they dropped to 2.25% in 2020, and "Now we are in a situation where we need to readjust investment strategies in the opposite phase of the past 40 years of falling interest rates."

As an investment portfolio strategy, he suggested reducing the proportion of stocks, which were effective during the low-interest-rate era, and increasing the proportion of bonds that offer lower volatility and fixed returns. He said, "Goldman Sachs' forecast in early November last year for the S&P 500's returns over the next 10 years is 2-5% annually, but currently, high-yield bonds (high-risk, high-return bonds) yield 7% annually," adding, "If you want to reduce risk, expanding bond investments would be reasonable." Regarding U.S. Treasury investments, he recommended investing in relatively short-term bonds with maturities of 2 to 5 years rather than long-term bonds like the 10-year note. This is because in the event of future interest rate declines, quick reinvestment can secure favorable returns.

He cited the fiscal deficit as the biggest risk to the U.S. economy. Marks expressed concern, saying, "The U.S. government acts as if its credit card is unlimited and bills will never come," and warned, "If spending is not aligned with revenue or taxes are not increased, this is unsustainable." He pointed out that the U.S. spends more than 80% of the federal budget on defense, social security programs such as Medicare and Medicaid, and interest on federal debt, making fiscal spending cuts very difficult. He emphasized again, "We don't know what will happen when the bills come," calling this the biggest problem for the U.S. economy.

Regarding the outlook for U.S.-China relations after the inauguration of Donald Trump's second administration, he was cautiously optimistic. He said, "For China to achieve economic growth of over 5% annually, trade with other countries like the U.S. is necessary," and added, "President Trump likes to create situations where he can declare victory, which could bring China to the negotiating table and ease tensions between the two countries." He predicted, "There is a possibility of announcements about improvements in U.S.-China relations in the coming years."

In response to questions about recent martial law, impeachment incidents, and political uncertainty in Korea, Marks said, "I believe Korea's institutions and systems will resolve these issues." He added, "Korea is a country with a very efficient and organized system, a highly educated population, and a strong work ethic, so it can overcome political uncertainty," and stated, "If I can identify quality companies and buy stocks at undervalued prices, I am willing to actively invest in Korea."