The current market turmoil has created an attractive environment for direct lenders. The dislocation in the public markets has driven borrowers to private lenders that can demand better pricing and lender-friendly terms. As a floating-rate asset, lenders are benefiting from the sharp increase in rates and all-in yields are in the low double digits.
On 20 March, investors awoke to news Swiss authorities had used emergency measures to push through a hastily arranged merger of Credit Suisse and UBS. Following two recent bank failures in the United States, the announcement raised questions over the health of European banks and the broader economy.
We expect energy equities will be resilient due to underinvestment in recent years. So, we don’t think investors should underweight this economic sector in the near term despite some long-term headwinds from decarbonization efforts. In real estate, we think offices may finally offer some attractive opportunities for the discerning investor.
We expect most liquid credits will generate higher returns in 2023 relative to 2022, given the better yields on offer. We also see private credit as offering opportunities, particularly in secondary trading.
Yes. The combination of rising interest rates and a deteriorating earnings outlook is likely to generate ample negative headlines about credit in the months ahead.
Yes. The Inflation Reduction Act (IRA) will generate significant benefits for companies involved in clean energy. The bill is anticipated to provide almost $370 billion over the next decade to a variety of industries, including utilities, transportation, and manufacturers of products such as batteries and solar components.
No, as the risk/reward remains uncompelling and spreads may widen further if a recession ensues. However, the sell-off has enhanced our enthusiasm for collateralized loan obligation (CLO) debt, which offers attractive pricing, solid fundamentals, and lower interest rate sensitivity than most other credit investments.
US small-cap stocks have underperformed large-cap peers in recent years, opening a significant valuation discount that seems hard to justify based on relative earnings strength or balance sheet health. The sector exposure of small-cap stocks may make them better positioned for the current environment of rising interest rates and high commodity prices. While small caps should always be a part of investors’ tool kits, now is an especially opportune time to add exposure, given historically low valuations.
Credit assets have sold off in recent weeks in unison with other risk assets, as market concern has shifted from one extreme of growth and inflation running too hot to another of stagflation, or even outright recession. Despite the improvement in credit pricing, we believe investors should be patient when adding to high-beta credit portfolios.
Overall, we view high oil prices as another headwind for expensive growth stocks and potentially European markets, which are more exposed via their reliance on Russian energy exports.