<\/p>\n
You can also listen to this podcast on iono.fm here.<\/p>\n
SIMON BROWN: I\u2019m chatting with Warren Buhai. He is senior portfolio manager at STANLIB Asset Management. Warren, I appreciate the time. You recently published a paper on early signs of stress that we\u2019re seeing in the global private credit market \u2013 this \u00a0after years of plentiful and cheap liquidity in the market.<\/p>\n
Is this long era of abundant liquidity slowly unwinding? Are we seeing early stages of a systemic crisis unravelling in the US private credit market?<\/p>\n
WARREN BUHAI: Thanks for having me on, Simon. I wouldn\u2019t say a \u2018systemic\u2019 problem. It\u2019s just for us the changing of the liquidity environment. As you mentioned, we went through a period of extremely low interest rates post Covid, probably over-stimulus. A lot of companies took advantage of that and raised loans at very low rates.<\/p>\n
Obviously rates now are a lot higher than that, even though we\u2019ve been through a cutting cycle over the last 18 months, and refinancing therefore becomes a lot more expensive.<\/p>\n
Read:
A noisy yet resilient year for US private credit
AI impact on software won\u2019t trigger save of downgrades, S&P Says<\/p>\n
Thrown on top of that, you\u2019ve seen changes in AI, a gentle pool rollout, and you\u2019ve obviously got the Iran conflict going on, which is causing oil prices to go a lot higher \u2013 and energy prices in general.<\/p>\n
This whole confluence of events is clearly weighing on things like private equity, private credit and especially the software sector within profit credit.<\/p>\n
SIMON BROWN: In essence, this is the life cycle of credit, of debt. This is nothing new, really, at all.<\/p>\n
WARREN BUHAI: Correct. Nothing new, although it has come at a time where AI is new, and certainly the rollout of logistic tools, which you\u2019ve only seen this year starting to impact especially the software companies \u2013 where you\u2019ve seen announcements of a lot of them laying off staff because the AI tools can do a lot of the coding work. That\u2019s obviously putting question marks over the sustainability of the revenue models in the software companies.<\/p>\n
It\u2019s coming at a similar time to that since the war started in Iran; you\u2019ve had a change in the kind of environment as to what people expect central banks to do.<\/p>\n
Read:
AI is driving more layoffs than companies want to admit
Meta is cutting several hundred jobs amid record AI spending<\/p>\n
If you remember going into the war expectation was still for a couple more cuts in most countries, including the US. That has kind of evolved now to where many countries are expected to hike rates two or three times this year because of what\u2019s going on with the energy prices.<\/p>\n
So I\u2019d say [with] those two, while it\u2019s a normal evolution of a cycle, we haven\u2019t really seen a big downturn in the credit cycle essentially since the GFC. So it could be the start of a big event, but it\u2019s very early days to tell if it\u2019s going to become bigger than that.<\/p>\n
SIMON BROWN: I take your point that the cycle is not new, but the timing of the positioning of it is what\u2019s new. This is primarily a US private credit issue. Does it extend much beyond or is it really just a US issue?<\/p>\n
WARREN BUHAI: Certainly at the moment we think it\u2019s concentrated in the US, purely because that\u2019s where most of the big software loans are in the software companies. In our estimates, from what we\u2019ve seen in the research, around 25% of the private credit market in the US is exposed to the software sector, and most other parts of the world don\u2019t have that level of exposure to things like software and the kind of sectors that we are currently worried about.<\/p>\n
Read:
The $3 trillion AI data center build-out becomes all-consuming for debt markets
Inflation edges up before Iran oil shock registers
Global rate path veers higher in wake of another Trump shock<\/p>\n
So at the moment it\u2019s definitely focused in the US. They also have a lot more complex structures in the US. They\u2019ve tried to do some restructuring of those loans, but most other parts of the private credit world, including South Africa, are a lot more vanilla and don\u2019t have the same exposure that the US private credit market has at the moment.<\/p>\n
SIMON BROWN: Gotcha. What are realistic contagion channels into South Africa, if any?<\/p>\n
WARREN BUHAI: Usually in times like this it\u2019s only going to be through the global event. We don\u2019t think there\u2019s big risk underlying in the South African private credit market, but certainly a spillover effect usually comes through things like the oil price staying higher for much longer than expected.<\/p>\n
It feeds into inflation expectations, therefore feeds into central bank expectations of hikes instead of cuts, as I mentioned before the war. And then just the normal kind of selling of liquid emerging markets.<\/p>\n
Read:
Ninety One expands EM private credit team
South Africa leads rebound in emerging markets hit by Iran conflict
Ninety One sees South Africa opportunities in war volatility<\/p>\n
While it\u2019s good, the story looks better than it has for a long time for South African assets, but the reality is in times of stress, when people sell assets globally, they often come to South Africa in the emerging market context because we have some of the most liquid equity, bond and currency markets. So that\u2019s kind of where it feeds into us.<\/p>\n
We kind of have a spillover because we are liquid, rather than because of any idiosyncratic problems in South Africa itself.<\/p>\n
SIMON BROWN: Yes. I see that often we are almost a proxy as an emerging market currency. You want to trade an EM currency; \u00a0you trade because of that liquidity that we see.<\/p>\n
For investors in South Africa, what should we be watching from a portfolio perspective?<\/p>\n
WARREN BUHAI: I think the obvious things to watch are the things that you can get access to quite easily, including US public credit spreads, or the high-yield spreads. How that\u2019s behaving is usually a good early indicator of the stress that\u2019s going in the credit markets publicly, and that often tends to feed off what\u2019s happening in private markets. And then the normal ones that come with higher oil and energy prices and the geopolitics going on at the moment.<\/p>\n
Read:
Inflation edges up before Iran oil shock registers
Global growth cools, delivering cold economic comfort for Africa
Energy prices can reshape monetary policy decisions<\/p>\n
So look at what happens with inflation expectations. Those tend to come out every month in different surveys, both globally and locally. What are expectations for growth going forward from here with high energy prices?<\/p>\n
And then things like recession risk \u2013 is there going to be a picking up? If the oil price does stay kind of above $90\/barrel for many more months, that\u2019s eventually going to start feeding into expectations of slower growth \u2013 and does that feed back into emerging markets? Those would be the obvious ones at the moment.<\/p>\n
SIMON BROWN: And the flip side of it \u2013 you mentioned oil there \u2013 I\u2019m not sure that this is a base case, but a sudden deceleration in the oil price back into the \u201980s, maybe even \u201970s, \u00a0would that sort of remove a lot of the risk and concern around the space?<\/p>\n
WARREN BUHAI: It would certainly ease the very short-term concern, because what that would allow \u2013 if energy prices could come back quite materially, as you mentioned, closer to prices as they were before the war \u2013 is for central banks to start thinking about not having to hike rates again this year, and almost going back into a cutting cycle that they started 18, 24 months ago.<\/p>\n
Read: Sarb expected to sit tight as oil spike reshapes inflation outlook<\/p>\n
They are still central banks. The good thing at the moment is they still say they\u2019re in a tightening environment, so they still think interest rates are too high in the long run. But they do certainly need oil prices to come down quite materially, as you mentioned, for them to even think about cutting again.<\/p>\n
SIMON BROWN: Yes. And whether that happens is a whole different story, which we\u2019ll leave on its own.<\/p>\n
We\u2019ll leave it there. Warren Buhai, senior portfolio manager at STANLIB Asset Management, appreciate the time.<\/p>\n
Listen to the full MoneywebNOW podcast every weekday morning here.<\/p>\n
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