- Preference for private credit: The focus is on long-term investments in private credit due to better return potential. Conversely, public stocks are preferred as risks decrease in the medium term.
- Impact of debt ceiling deal on U.S. stocks: U.S. stocks reached highs in 2023 based on hopes for a debt ceiling agreement. Yields increased due to expectations of further rate hikes, and rate cuts are not anticipated this year.
- Inflation and wage pressure: U.S. PCE data will help assess the persistence of inflation. Wage pressure resulting from worker shortages is expected to keep inflation above policy targets for some time.
- Opportunity in private credit: The banking tumult has led to a preference for private credit over public credit on a strategic horizon of five years or longer. Private credit can fill the lending gap left by banks and provide attractive yields to investors.
- Repricing in private credit: The repricing in private credit is seen as an opportunity to adjust strategic views and capitalize on the potential of private credit in filling the lending gap. Higher yields in direct lending are compensating for risks.
- Potential boon for private credit: The troubles in the banking sector and tightening credit conditions create opportunities for private credit, as banks may pull back on lending. Non-bank lending and private credit can play a greater role.
- Benefits of private credit: Private credit, specifically direct lending, offers potential benefits to borrowers, such as dealing with one private lender instead of a group of banks. The private nature can also avoid spooking financial markets.
- Strategic view on equities: The strategic preference is for public equities over private equities. Developed market equities are still favored but are tactically underweight on a six-to-12-month horizon.
- Impact of inflation on investment themes: Core inflation remains stubbornly high in developed markets due to production constraints and worker shortages. Central banks are unlikely to cut rates, and a recession is anticipated.
- Pricing in the damage: The new regime requires continuous reassessment of economic damage caused by central banks. Financial cracks are emerging in the U.S., such as higher mortgage rates affecting home sales and deteriorating CEO confidence.
- Rethinking bonds: Fixed income offers income opportunities after global yield surges. Very short-term government paper is preferred for income and capital preservation. Long-term government bonds may not offer the same benefits as in the past.
- Living with inflation: High inflation is expected to persist above policy targets due to various factors, including aging populations, geopolitical fragmentation, and the transition to a lower-carbon world. Inflation-linked bonds are favored.
- Investment implications: Tactical underweight on DM equities, preference for very short-term government paper over long-term government bonds, and overweight on inflation-linked bonds on both tactical and strategic horizons.
