After the Fed cut in 1998, interest rates began rising again in 1999 as the global economy regained speed. Picton thinks the same thing will happen again.
That means interest-rate sensitive investments will underperform as the recovery takes hold, said Picton, whose firm has about C$7.5 billion ($5.6-billion) in assets under management. The firm is shorting some rate-sensitive securities and buying derivatives that will pay off if rates go back up.
And if its is indeed the late 1990s all over again, how else should investors play it?
“The very simple answer is, take risk across all asset classes, understanding that you’re probably in a giant poker game against everybody else who’s doing the exact same thing,” he said.
Missing Signals
For Picton, the sharp gains in government bonds is overdone and the correction in risk assets, especially in high-yield debt, is reflecting a near-term outlook of negative economic data.
There is “so much of a narrative that rates will not go up again that the bond market is somewhat missing on the plain signals that would have been picked up in the past,” he said. “I don’t believe that the bond market’s going to get it right this time, like they did back in 2008 in the last recessionary phase.”
One of his top picks is First Quantum Minerals Ltd., which has started the world’s largest copper mine in the Panamanian jungle, in an environment where supply is probably less than demand growth, according to Picton.
“Inventory’s already low and more importantly there’s no new projects that you can see on the horizon,” he said.
This article was provided by Bloomberg News.