Weekly Investment Commentary: Public or private – both deserve credit
Bottom line up top:
- A soft-landing cocktail ‘straight-up’ or ‘with a twist?’ Last week’s economic data gave investors another reason to believe inflationary pressures may be subsiding. Both, the U.S. Producer Price Index and retail sales were softer than expected in December. This “bad news is good news” narrative for monetary policy implications, led Treasuries to rally on growing confidence that the U.S. Federal Reserve may slow the pace of rate hikes. However, equity markets took this cocktail of data points with a twist, finishing down for the week. Though one may have expected any sign of lower inflation would whet risk appetites, investors seemed more concerned about the potential headache of a recession.
- A slow leak, not the sinking of the Titanic. Last week’s disappointing retail sales report may point to an economy that is taking on water. Although, to be fair, December has historically been the weakest average month for retail sales (Figure 1). While our base case still calls for a mild recession this year, we aren’t heading for the lifeboats just yet. We will continue to reassess with each new piece of available data.
- A fixation with fixed income. We continue to favor fixed income markets over equities as we consider what 2023 may have in store for risk assets. With the bulk of rate hikes almost certainly behind us, we believe areas within both public and private credit markets are poised to provide attractive total returns.
“Our base case calls for a mild recession… We aren’t headed for the lifeboats yet.”
Prior to 2022, investors were forced to chase yields in private fixed income as yields in public fixed income remained stubbornly low. The sharp rise in interest rates in 2022, however, now leads us to suggest a more blended approach for yield seeking investors. Within a multi-asset credit portfolio, assessing the tradeoff between public and private fixed income warrants consideration of several factors, including diversification, volatility, liquidity and relative value.
Across plus sector fixed income, we prefer a higher quality approach as we face an uncertain economic backdrop. Attractive income generation sectors include high yield corporates (yielding north of 8%), broadly syndicated loans and CLOs. On the high yield front, issuers are entering a potential economic slowdown with solid fundamentals. On the other hand, loans and CLOs could benefit from the high short-term interest rates that should persist throughout 2023.
Within private credit, the illiquidity premium can be blended with public markets to offer a potentially attractive yield and volatility profile. We favor defensive sectors like health care, business services, and technology and software as we enter a potential recession. Additionally, thanks to limits on interest coverage ratios (which determines how well a company can service their debt), leverage is down meaningfully. This adds to our conviction that private credit should continue to be resilient as the economy weakens.
“The sharp rise in interest rates in 2022 suggests a blended approach across public and private fixed income.”
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:
- macro and asset class views that gain consensus among our investors
- insights from thematic “deep dive” discussions by the GIC and guest experts (markets, risk, geopolitics, demographics, etc.)
- guidance on how to turn our insights into action via regular commentary and communications
All market and economic data from Bloomberg, FactSet and Morningstar.
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