Economic volatility could breed investment opportunities

The economy is still in the very early stages of a deleveraging process that needs to play out, spurred by the recent liquidity crunch that saw the stumbling of insurer giant AIG, delegates of A.M. Best’s Review & Preview Canada conference in Toronto were told.
Michael Taylor, the vice president and associate director, fixed income product management with Wellington Management, offered attendees of the conference an investment overview.
The deleveraging process that needs to occur, he continued, will generate volatility.
“How much volatility is generated by this deleveraging will depend on its speed,” Taylor said. “A gradual deleveraging will allow the industry to earn its way out of its bad asset problem. A rapid deleveraging will cause liquidity shocks that could ultimately lead even solvent institutions to experience the types of things that we’ve seen in the past few days.”
Either way, he continued, one certainty moving forward is that the cost of capital will increase and the availability of capital, even to credit-worthy borrowers, will be lower.
The result, he continued will serve to slow economic growth around the world.
But, he continued, the volatility in the financial market may create opportunities for insurers’ investment portfolios.
“I think in the very short term, in the volatility that we’re seeing right now it is very difficult for fundamental analysis to predict where asset prices will go in the short term. However, in these types of environments where you see liquidation-driven prices it does create tremendous dislocations and phenomenal opportunities for longer-term investors.”
The important thing that an investor needs to determine is: Are they a provider or a user of liquidity?
“If you are a provider of liquidity you are now in the driver’s seat. This is now a buyer’s market. If you have dry powered cash to go to work, you are in a very good position to realize some great bargains in the markets.
To the extent that you are a user of liquidity and require short-term financing or expect to see cash flows, this is an opportunity for you to look at liquidity,” he said. “Liquidity is now at a premium. Investors are willing to pay quite dearly for liquidity.
“Volatility is not fun, but it does breed some tremendous opportunities. As long as you are nimble and looking at the long-term.”