Oaktree’s Howard Marks Says Investors Are Underestimating AI

Howard Marks, co‑founder of Oaktree Capital, attended the fifth annual Qatar Economic Forum in Doha on May 21, 2025. The forum will bring government and business leaders together to discuss drivers of the global economy. This is a topical networking and policy discussion with limited direct near‑term market impact.

Analysis

Howard Marks’ presence at a Gulf-focused forum is a signal, not just celebrity: it telegraphs that large credit allocators are scouting EM private-credit and distressed opportunities rather than public-equity plays. When $50–150bn of institutional dry powder pivots toward private EM debt and infrastructure over 6–24 months, liquidity in public EM markets tends to compress and bid-ask spreads widen, favoring managers with origination pipelines and local balance-sheet access.

The immediate competitive winners are alternative-asset managers and banks that can warehouse and structure cross-border credit (think large credit platforms), while passive EM equity providers and liquidity providers take the short-term hit. A rotation of yield-seeking capital into privately negotiated EM instruments also raises second-order FX risk for sovereigns that rely on short-term portfolio flows; expect higher realized FX volatility in 3–12 month windows around policy surprises.

Key tail risks: a renewed Fed tightening cycle (real yields +75–100bps within 3–6 months) or a 20%+ drop in oil prices would rapidly reverse the search-for-yield flow, forcing private-credit mark resets and widening public credit spreads. Conversely, a coordinated GCC deployment into EM assets or a benign Fed pivot could compress EM USD sovereign spreads by 50–150bps over 6–12 months and materially uplift private-credit valuations.

The consensus — that EM equities will be the primary beneficiary — is incomplete. The more durable trade is a structural shift of institutional allocation from listed EM beta to bilateral/private credit and real assets; public markets may see muted upside as liquidity is siphoned off, so prefer credit-exposed and origination-heavy exposures over broad EM equity long-only positions.

Key Decisions for Investors

• Pair trade (3–12 months): Long EMB (iShares J.P. Morgan USD Emerging Markets Bond ETF) + Short EEM (iShares MSCI Emerging Markets ETF). Rationale: capture EM hard-currency spread compression vs limited upside in public equities as capital rotates to private credit. Risk/Reward: target +3–6% absolute vs downside if USD strengthens >3% or risk-off spike; hedge USD by sizing short UUP if necessary.
• Barbell allocation to credit managers (12–24 months): Buy BX (Blackstone Group), KKR (KKR & Co.) and CG (Carlyle Group) at 5–8% portfolio tilt. Rationale: direct exposure to private-credit origination and fee accrual; expected 8–12% realized return on new private-credit vintages. Risk/Reward: managers are leverage-sensitive — downside if credit cycle reaccelerates; use 6–12 month call overwrites to enhance yield.
• Tactical protection (1–3 months): Buy a 3–6 month put spread on EEM (10–15% OTM) sized to cover EM exposure. Rationale: cheap insurance against a policy- or Fed-driven reversal that forces public EM de-risking. Risk/Reward: limited premium cost (~1–3% of notional) for asymmetric downside protection.
• Opportunistic allocation to EM private/distressed (12–36 months): Commit incremental capital to closed-end funds or managers with EM distressed pipelines (size 1–3% AUM). Rationale: early mover advantage in bilateral restructurings and asset-level control positions; expected IRR >12% if sourced off-market. Risk/Reward: illiquidity and mark-to-market volatility; stagger commitments and negotiate NAV-based gates.