Jim Coulter, co-founder and CEO of TPG, which manages $120 billion in investments, has undergone seven or eight major market resets, and this experience has led him to some form of pattern recognition in how the downturn is progressing.
He says there are “three chapters” in these difficult periods for investors, and the first one is now over, or at least nearing completion. The market has now gone through the process of multiple resets, which given where the stock has been valued in the past year, is something investors should have seen coming.
“What was weird is not today, but last year,” Coulter told CNBC on Tuesday from the Aspen Ideas Festival. “Everyone was worried about whether ‘Alice in Wonderland’ was last year,” he said. Although Coulter left some wiggle room in his call that multiple resets are on track, noting that ratings are still well above the 10-year average, “so it’s probably not over yet.” “You tend to go above average at a moment like this,” he added, and investors need to be prepared for that.
But Coulter believes “Chapter Two” should be the focus now on the following major equity pressures: It’s no longer out of control multiples but specifically weak earnings.
“Now we’re moving into the second quarter and it’s making gains, and so far, they’re doing well in our portfolio,” he said. But he cautioned that when an investor looks across the market, “the profits haven’t shifted yet.”
The S&P 500 is still showing 10% growth this year and 9% next year, and Coulter thinks inflation will take a big chunk of that, tracking supply chains and hitting earnings in many sectors. This does not mean that all the money has to be cash. Coulter said he’s investing in healthcare, technology and other “high value-added industries” he didn’t identify, where companies have higher pricing power. It does not invest in industries where wage inflation will squeeze margins and firms do not have pricing power. “They are the most exposed,” he said.
Jim Coulter, CEO of TPG and Co-Founder: Alpha with Impact
Coulter said there’s a lot of money on the sidelines now, but in addition to the industries he mentioned, TPG has just struck a $750 million deal for a solar developer that talks about long-term plays that will always make sense regardless of the exact timing of the deal. But overall, it’s a bad moment to spread bets all over the place because “buyer and seller don’t know where to meet,” he said. “We’re in the middle of it…until this meeting of minds comes, deal activity will be delayed.”
Private markets where TPG is most active as an alternative asset manager that follows public markets in revaluations because it is not valued on a daily basis like publicly traded stocks. But over time, this is a mantra and private equity is back in the line now, too. David Rubinstein, co-chairman of The Carlyle Group, made the same point Monday from Aspen, telling CNBC that the EBITDA multiples are down, but they will “drift downward” more.
Eventually, “Chapter Three” will begin in Coulter’s style, and he has tied it up some time next year. That’s the downside, and “that’s the question for all of us as investors.”
Much of the market volatility has been attributed to investors’ fears that the Federal Reserve will not be able to engineer a “soft landing” and that its aggressive rate hikes to combat inflation will lead to a recession – if no one really enters the US economy. Fed officials say a recession is not inevitable and not the “core issue” but some prominent CEOs, including Ken Langone and investors including Kathy Wood, aren’t sure.
Coulter is not placing any bets on a soft landing for the economy. He wants to cut out first aid. “Personally, I hope it will be hard and fast,” he said. “When it happens fast and hard, the market starts looking ahead.” “If you look at what happens in the markets when they flip, that’s after the recession hits, if it’s going to happen,” he added.
As long as investors are in a position to watch the Fed “still chasing” the outcome of inflation, rather than making the next official policy shift, he said the stock market would not react favorably.