China is going through its teenage years, and its struggles with growing into a mature economy could bring an end to the globe's ongoing recovery, now in its sixth year, speakers agreed at the Milken Institute Global Conference Monday.
“China is (in) a middle transition period,” said Mohamed El-Erian, chief economic adviser at Allianz. “It's a hard transition … like a teenager.”
Mr. El-Erian was speaking on a panel titled “Global Capital Markets: Deflation or Stabilization.”
But it's a tough adolescence. Only five countries have successfully transitioned, he said.
“Argentina has repeatedly failed,” Mr. El-Erian said.
China is trying to move its economy from an export economy to a consumer-driven economy “at a time when the world is not as supportive,” he said.
China is making the same mistake with a policy of encouraging its citizens to own stock that the U.S. made with its earlier policy of encouraging home ownership, he said: Both went too far and both created bubbles.
Speaking on the same panel, Afsaneh Beschloss, founder, president and CEO of money management firm Rock Creek Group, predicted that financial technology companies that are now disrupting retail banking will move on to institutional investment.
“I think there will be growth in the institutional world.”
On another panel, “The Alchemy of Capital Structure,” Joshua Friedman, co-founder, co-chairman and co-CEO of alternative investment firm Canyon Partners, said that “this is a time for caution.” Beta exposure is scary, he said. One of the reasons is that technology companies are displacing traditional companies. It's a time to “keep powder dry,” Mr. Friedman said, referring to committed but uninvested capital.
That caution doesn't mean managers aren't investing or leveraging companies. Jonathan Sokoloff, managing partner, of private equity firm Leonard Green & Partners, said on that same panel that his firm has not stopped investing.
“There is always time for caution but we are in the business of investing,” Mr. Sokoloff said. Mr. Sokoloff noted that his firm concentrates on investing in high-growth companies, especially in the U.S., and is not afraid to pay high prices for investments. “We wish we were better at buying cheap,” he said.
And Leonard Green & Partners is “borrowing every nickel we can.”
“There's no shortage of credit,” he said. “We are issuing all we can.” When investors pay a high price, the bet they are making is that they will sell the company at a very high price, said Joshua Harris, co-founder and board member of alternative investment management firm Apollo Global Management, who also spoke on the capital structure panel.
“We question whether that will be the case,” he said.
Panelists also addressed what will happen to global economic growth when the world governments' quantitative easing measures stop working.
“It's hard to find places to put your money if you are an opportunistic player,” Mr. Harris said. “You have to look where there is carnage.”
While the “wall of maturities” has been dealt with, there are some “big names in the high-yield market where there will be a day of reckoning,” Mr. Harris said.
