'No Growth in Any Credit Instrument': Fund Manager
Hedge fund manager John Burbank says the risk-reward in this market dramatically favors equities, and he warns there is "no growth in any credit instrument."
"I definitely prefer equity here, credit has been taken to almost a 'Nirvana level.' Allocators were correctly risk-averse here, and all that money that went into credit produced spreads that are now extremely tight and not appropriate for the current economic environment," Burbank told CNBC's "Squawk on the Street" on Friday.
Burbank, whose 13-year-old firm, Passport Capital, has $3.7 billion of assets under management, said that, relative to equity, spreads on credit are their lowest level. He pointed to yields in junk bonds, which he said "for the first time ever (were) trading tighter than the S&P earnings yield. So, the junk bond companies basically have no revenue growth, no EBITDA growth and are obviously very susceptible to a bad economy."
High yield bonds have "limited upside because there is no growth in any credit instrument. You only have downside when spreads are get really tight," said Burbank. "I'm not predicting with all this constant liquidity that it's all going to go down. I'm just saying that the risk-reward is much worse than for equity."
"After the recognition of central bank easing coming in Japan and Europe, the risk-reward of credit is actually turning into more risk. Any kind of inflation in the distance is terrible for credit and a boost to a lot of equities generally," he said. "I'm not a believer that all equities are going to do well. The economic environment is not that good."
"Productivity has actually been declining and to be honest, if there is any wage pricing power of the employed, margins are going to come down for companies which is not going to be good for a lot of equities," Burbank said.
Despite the strong Friday jobs number in the U.S, Burbank believes that around the world there is "a recession" and "recessionary conditions," and urges caution when looking at government numbers, such as CPI and unemployment. "Who we count as job seekers is highly controversial and the level of overall unemployment is quite high," he said.
"What I like are the high-value added companies, the multinational leading companies, I think their prospects are quite good, but they don't have a lot to do with economic growth here," he said, adding that he sees incomes in the United States are decreasing over time.
"All equities are not equal. I come down on equity if there is great corporate governance, alignment with shareholders and using free cash flows correctly," he added. "Since the financial crisis, there has been a tremendous change, a sobriety in boardrooms and managements. We're getting capital allocation that is very, very good. It's not happening around the world—governance around the world has not improved tremendously. But in the United States it really has."