U.S. No longer needs large stimulus, Oaktree's Marks says

The U.S. economy is strong enough for the government to exit quantitative easing, said Howard Marks, co-chairman of Oaktree Capital Group LLC, the world's largest distressed-debt investor.

Investors still need to be cautious amid lingering uncertainties and elevated securities prices, Marks said in an interview with Bloomberg Television's John Dawson in Hong Kong today. The Los Angeles-based company he co-founded managed $93.2 billion at the end of the third quarter.

The Federal Reserve last week ended treasuries and mortgage-bond purchases that constituted its third-round of quantitative easing to help boost economic growth and investor confidence. The U.S. central bank's balance sheet swelled to a record $4.48 trillion during injections that started in November 2008 during the longest and deepest recession since the 1930s.

“I think it's a great thing for the government to be out of the role of setting interest rates and influencing markets,” said Marks. “Markets are doing a pretty good job on their own if allowed to do so. I think our economy is doing OK, so I don't think it requires a great deal of stimulus.”

Policy makers and economists such as St. Louis Fed President James Bullard called on the central bank to delay the end of quantitative easing as growth in Europe stalls and inflation expectations decline.

Being Cautious

There has been a real dichotomy between “unusually weak” economic recovery and very vibrant stock markets, Stephen Roach, a Yale University senior fellow and former non-executive chairman of Morgan Stanley in Asia, said at a forum in Beijing on Oct. 28.

The U.S economic recovery is still slow, gradual and unsteady, Marks said. It is “the best house on a bad block” when there's less economic vigor and bigger problems elsewhere, such as in Europe and Japan, Marks said.

“The most important thing now is to include a good healthy dose of caution in the things you do,” he added. “The outlooks are not so strong, and securities are not so low that you should buy aggressively or without mindfulness of the risks.”

U.S. stocks are still “somewhat under-loved and under- owned,” Marks said during a separate meeting with reporters. With the market in its third year of rally, “there aren't screaming bargains.” The cohesion of Europe is in question with a potential referendum in the U.K., he said.

Attracting Funds

Alternative-asset managers like Oaktree are seeing strong cash inflows because investors are shunning low-yielding quality bonds and are not excited about stock markets, he said.

“We're seeing a lot of interest in emerging-market equities,” Marks said. “We're seeing a lot of demand for fixed-income products which pay premium yields.”

Taking a long-term view, China's securities prices remain “reasonably attractive,” he said. Stock prices in Japan are expensive because the government hasn't proven they can restart growth and inflation, he added.

Oaktree in November agreed to set up an equally owned venture with government-backed China Cinda Asset Management Co. The duo plan to invest as much as $1 billion to buy soured loans and troubled assets in the world's second-largest economy, a person told Bloomberg News then.

Oaktree is scouting for large opportunities where it can make “asset-based investment decisions” in China, he added.

Credit Expansion

Globally, prices of properties other than grade-A buildings in prime cities are well below pre-2008 global financial crisis levels and deal flows are strong, he said.

“Pound for pound, we've been putting more money into this kind of investments over the last few years than any other areas,” Marks said.

Distressed-focused funds have found difficulty investing money as the Fed holds interest rates near zero and global corporate defaults remain low. Global defaults fell to 66 last year from a peak of 266 in 2009, according to Moody's Investors Service.

Oaktree's third-quarter profit fell 47 percent as it sold fewer holdings from its Opportunities VII fund, which invested in distressed securities during the financial crisis.

Oaktree has seen “plenty of unwise expansion of credit,” usually a precursor to defaults, Marks said. Yet it remains to be seen when defaults will rise given economic growth in the U.S. and accommodating capital markets.

“The logs in the fireplace have not been turned into a conflagration yet,” he said. “Some day it will. Who knows when?”