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John Calamos, Sr.: “The outcome of the US election could have a big impact on the economy”
The COVID-19 pandemic has had significant ramifications for the global economy and the markets. In these uncharted waters, it’s understandable that many people have questions. Few in the financial services industry can draw on the depth of experience of John P. Calamos, Sr., the Founder, Chairman and Global Chief Investment Officer of Calamos Investments. Throughout his 50-year career, John has established himself as a pioneer of innovative strategies designed to manage the risks in the economy and markets. Calamos Investments is a recognized leader in investment strategies utilizing convertible securities and offers a wide array of asset allocation solutions.
John P. Calamos, Sr. founded his firm in 1977. With origins as an institutional convertible bond manager, the firm has grown into a global asset management firm with major institutional and individual clients around the world. The firm aims to deliver superior risk-adjusted performance through a range of U.S. and global investment strategies including equity, fixed income, convertible and alternative investments.
With 50 years of industry experience, he is often quoted as an authority on risk-managed investment strategies, markets and the economy. He is a frequent speaker at investment seminars and conferences around the world and appears regularly on CNBC, Bloomberg TV and Fox Business Channel. He has written two books: Investing in Convertible Securities: Your Complete Guide to the Risks and Rewards and Convertible Securities: the Latest Instruments, Portfolio Strategies, and Valuation Analysis.
He received his B.A. in Economics and an M.B.A. in Finance from the Illinois Tech. He joined the United States Air Force after graduation where he served as a combat pilot during the Vietnam War and ultimately earned the rank of Major.
In the Q&A below, John shares his perspective on the global economy and his thoughts on how to navigate the investment risks in these unprecedented times.
What are your thoughts on the current global market environment?
2020 has been an extraordinary year—and we are only at the halfway mark. I don’t think anyone could have predicted how fast and suddenly the markets could have fallen—or how quickly they could rebound. We’re seeing this rebound in equity markets around the world, spanning both the developed markets like the US, as well as emerging markets.
So far, we’re seeing a “V-shaped” recovery. In my view, 2020 reminds us about the resilience of the global economy and the markets. For investors, the main lesson is that you need to be long term in your approach. It’s really dangerous to let fear—or greed—dictate your actions. This year makes it clear how difficult and dangerous it is to try to time the markets.
Tell us more about this first idea—the resilience of the economy and the markets.
Humankind is tremendously resourceful in the face of challenges and hardships. The global pandemic is not over, and we don’t know when a vaccine or a widely effective treatment will be developed. But, we are finding ways to respond. For example, as the pandemic took hold, we saw extraordinary monetary and fiscal stimulus around the world, which helped to stabilize economic conditions. Now, the US and other shuttered economies have begun to re-open. Asian economies, the first to face the pandemic, are showing real signs of recovery. Many businesses have devised innovative solutions to adapt in this unprecedented period, and companies have accessed the capital markets (for example, by issuing convertible securities or corporate bonds) to shore up their liquidity needs.
Will the economic downturn last long?
I’m cautiously optimistic that the downturn will be relatively short lived. A lot of people may be worried that what we are seeing now is similar to the Great Financial Crisis of 2008 and 2009, but there are some key differences. For example, in response to the global pandemic, fiscal and monetary response has been unprecedented in scope. The banking system has been resilient, and there’s access to credit. U.S. consumer balance sheets are also in far better shape today than in 2008. There’s pent-up consumer demand waiting to be released, and the economy should benefit as people begin to spend more.
So, in terms of the markets, is the worst behind us?
I believe markets will remain volatile as the global economy addresses its current set of challenges. But it’s important to remember that there’s opportunity in all environments, including volatile ones. From an investment standpoint, our teams are looking through the short-term noise, staying disciplined, and focusing on the trends that are emerging. The pandemic will have near- and long-term impacts on behaviors, and these changes will impact the prospects of companies. Even with all the backstops put in place and a release of catch-up demand, not all companies will survive if they must operate with permanently reduced capacity.
Looking beyond the uncertainty of the pandemic, what are some of the other unknowns that matter most to the health of the economy?
Fiscal policy is extremely important, so the outcome of the US election could have a big impact on the economy. Economic conditions could be improving, but depending on the political backdrop, corporations may not be optimistic if they are worried that future fiscal policy will be less business-friendly. Inflation is not a concern for 2020, but we may see modest rises with pressure building in 2021 and thereafter, as supply chains become more localized in individual countries and labor becomes scarcer.
Many investors are worried about the risks of investing now. What advice would you give to them?
My advice would be that keeping a long-term perspective is exceptionally important, given the dangers of hopping in and out of the market. I believe there is opportunity in all market environments. If you wait for the “all-clear,” there will never be a good time to invest.
The economy and the markets almost never recover at the same pace. Volatility increases the temptation to make sudden shifts to your allocation, but that’s a bad idea. People end up getting whipsawed—catching the downside and missing the upside. See what has just happened over the last three months: the strongest/fastest market rout that I remember was followed by a rebound that nobody could imagine.
As of a couple of weeks ago, the rebound seemed at odds with what’s going on in the broader economy, but more recent global economic data has begun to show signs of recovery. People who sold at the lows, due to panic, have missed out and locked in their losses.
What are some of the approaches that investors can take if they are concerned about the risk in the markets?
Selloffs such as the one we saw earlier this year give investors a renewed appreciation for risk management. I believe there are many ways to manage risks and pursue opportunity. Calamos Investments was built with a focus on providing ongoing risk-managed solutions, which seek to work over full market cycles—through good times and bad—with a focus on resilience during market selloffs.
When it comes to navigating this current environment, I believe it’s important to stay diversified—as I mentioned. In addition to having allocations to stock funds and bond funds, for example, there can be considerable potential for other types of investments. One type of investment that we have used since the 1970s is convertible securities. When I first began investing with convertible securities, they weren’t well known, but today they are a global asset class totaling nearly $358 billion. With active and risk-conscious management, the convertible security can be used to pursue many investment goals—for either investors focused on income or capital appreciation.
I’ve always been interested in non-traditional ways to help clients manage the risks in the markets and achieve their goals. That’s what first attracted me to convertible securities, and I’ve kept a focus on risk management top-of-mind through the decades.
That focus on managing risk has guided our suite of investment strategies, including alternative strategies. Alternatives can also help investors enhance their asset allocations, through the use of sophisticated investment strategies. It used to be that individual investors weren’t able to access these types of strategies, but that has changed through the years. Calamos Investments was one of the first U.S. companies to offer a liquid alternative mutual fund, and today we are one of the largest providers of alternative mutual funds.
Do you have any views on how investors should allocate their portfolios from a global perspective?
For the long-term investor, I really believe in the benefits of a global perspective. Calamos Investments has built our expertise as global managers. We recognize that there are exciting opportunities in companies around the world tied to many different trends, such as technology innovation in Asia and “green” initiatives in Europe. Taking a globally diversified approach provides a way to access this growth.
“Home-country bias” limits the opportunity set. For example, for US investors, there are many great companies in the US, including innovators in ecommerce, social media and health care. However, this fast-paced innovation is also going on around the world, including in the emerging markets. Our teams are finding many non-US companies with solid fundamentals and good corporate governance that offer very strong potential. These companies are also benefiting from a deep understanding of and better access to their local markets, which gives them an edge over US companies.
Additionally, countries outside the US are also at the leading edge of global demand trends that we expect to grow stronger as a result of the pandemic’s disruption. For example, artificial intelligence, highlighted recently in measures and processes taken in Asian countries to monitor COVID-19, is an area with strong high-level penetration outside the US. Many non-US companies are at the forefront of bioprocessing and biologics (complex drugs that contain live cells which can be very effective for treating complex diseases).
Do you have any closing thoughts about managing risk?
I believe this is an environment where experience and active management matters. There will be winners and losers in this next phase of the economic cycle. Passive strategies—like index funds—have grown in popularity over recent years, but they can’t take the selective approach that an active and risk-aware manager can.
Convertible securities entail interest rate risks and default risks. International investments entail added risks, these are increased for emerging markets. Alternative strategies entail added risks and may not be suitable for all investors.
Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. The views and strategies described may not be appropriate for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations.