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Weekly Investment Commentary: A private discussion
Bottom line up top:
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Feeling the upward pressure. Consensus expectations for the fed funds terminal rate have risen sharply and are now firmly in-line with the U.S. Federal Reserve implied rate of approximately 5.4%. This upward shift resulted in a drawdown in public equities for the month of February, while the 10-year Treasury yield topped 4% last week for the first time in almost six months. Adding fuel to the fire, February’s preliminary ISM manufacturing report revealed contractionary activity, but a surprise increase in prices paid by manufacturers contributed yet another data point to the transitory disinflation narrative.
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Don’t be afraid to keep your portfolio allocations private. No, we’re not suggesting that you can’t discuss your portfolio allocations responsibly in public. Rather, in the ongoing debate of whether investors should pull back from private market allocations, we believe both private credit and private equity deserve attention. Following strong relative performance in 2022, we believe imbalances between inflation and interest rates, combined with a strong underlying economy allows private credit and equity to deliver superior income and attractive total returns relative to their public market counterparts, through and past a recession.
“Both private credit and private equity deserve attention.”
Portfolio considerations
Within multi-asset portfolios, we believe blending private credit with private equity may offer an attractive yield with upside potential from capital appreciation. Both asset classes contributed to lower volatility and outperformed their public market equivalents during the Global Financial Crisis (Figure 1). We do not anticipate a deep recession, however, should one occur, we anticipate both asset classes should prove resilient again.
Within private credit, we favor defensive sectors like health care, business services, technology and software. Additionally, leverage is down meaningfully due to limits on interest coverage ratios (which determine how well a company can service their debt). This supports our conviction that private credit could still be resilient as the economy weakens.
Within private equity, we prefer middle market companies, which have market caps of between $75 million and $2 billion. During both the financial crisis and subsequent decade, the U.S. private equity middle market segment outperformed its large cap counterpart (Figure 2). Additionally, these companies have proven their ability to be flexible in addressing changing external factors. We are seeing strong businesses operating in attractive end markets with long-term secular growth trends. This leads to our preference for the technology and health care sectors within the middle market segment.
“Imbalances between inflation and interest rates, combined with a strong underlying economy allows private credit and equity to deliver superior income and attractive total returns.”
Nuveen’s Global Investment Committee (GIC) brings together the most senior investors from across our platform of core and specialist capabilities, including all public and private markets.
Regular meetings of the GIC lead to published outlooks that offer:
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macro and asset class views that gain consensus among our investors
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insights from thematic “deep dive” discussions by the GIC and guest experts (markets, risk, geopolitics, demographics, etc.)
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guidance on how to turn our insights into action via regular commentary and communications
Endnotes
Sources
All market and economic data from Bloomberg, FactSet and Morningstar.
This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her financial professionals.
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature.
Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Performance data shown represents past performance and does not predict or guarantee future results. Investing involves risk; principal loss is possible. Investing involves risk; principal loss is possible. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on nuveen.com. Please note, it is not possible to invest directly in an index.
Important information on risk
All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity investing involves risk. Investments are also subject to political, currency and regulatory risks. These risks may be magnified in emerging markets. Diversification is a technique to help reduce risk. There is no guarantee that diversification will protect against a loss of income. Investments will be subject to risks generally associated with the ownership of real estate-related assets and foreign investing, including changes in economic conditions, currency values, environmental risks, the cost of and ability to obtain insurance, and risks related to leasing of properties. Investors should be aware that alternative investments including private equity and private debt are speculative, subject to substantial risks including the risks associated with limited liquidity, the use of leverage, short sales and concentrated investments and may involve complex tax structures and investment strategies. Alternative investments may be illiquid, there may be no liquid secondary market or ready purchasers for such securities, they may not be required to provide periodic pricing or valuation information to investors, there may be delays in distributing tax information to investors, they are not subject to the same regulatory requirements as other types of pooled investment vehicles, and they may be subject to high fees and expenses, which will reduce profits. Alternative investments are not appropriate for all investors and should not constitute an entire investment program. Investors may lose all or substantially all of the capital invested. The historical returns achieved by alternative asset vehicles is not a prediction of future performance or a guarantee of future results, and there can be no assurance that comparable returns will be achieved by any strategy. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, derivatives risk, dollar roll transaction risk and income risk. As interest rates rise, bond prices fall. Below investment grade or high yield debt securities are subject to liquidity risk and heightened credit risk. Foreign investments involve additional risks, including currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. Please note investments in private debt, including leveraged loans, middle market loans, and mezzanine debt, are subject to various risk factors, including credit risk, liquidity risk and interest rate risk.
Nuveen provides investment advisory services through its investment specialists.
This information does not constitute investment research as defined under MiFID.