Market insights

Weekly market commentary

Public or private? A strategic question

Weekly video_20230522

Vivek Paul

Opening frame: What’s driving markets? Market take

Camera frame

The recent banking tumult has reshaped opportunities for income as we navigate a volatile regime.

Title slide: Public or private? A strategic question

We now prefer private over public credit long term. We see a mirror image in equity, strategically preferring public to private.

1: We favor private credit

Some private market assets are starting to reprice. We see opportunity in direct lending where yields have increased.

Private credit is not immune to a growth slowdown or tighter credit conditions, but we think higher yields better compensate investors for the risks we see ahead, given the natural implementation lag for investing in this asset class. And that’s after factoring in the risk of worsening credit quality.

The floating rates nature of the asset is an additional benefit in the current rate environment.

2: We see reduced bank lending

The fallout from recent banking tumult is also likely to lead to reduced bank lending.

We think that adds to pressure on public credit spreads but could be a boon for private credit as companies look beyond banks or public markets for financing. Still, we prefer to be up in quality within private credit, with eyes on deal terms and lending standards. We look for quality within private credit.

3: We see a mirror image in equites

Our strategic view on equities is the opposite of credit: We prefer public to private.

We think listed stocks have repriced relatively more, and for those who can look through near-term dislocation, the allocation to public equities should start from an overweight.

Outro frame: Here’s our Market take

Private markets overall are complex, with high risk and volatility, and aren’t suitable for all investors.

We go overweight income private markets and move to neutral on global investment grade credit. We’re still strategically overweight developed market equities and underweight growth private markets.

Closing frame: Read details:

www.blackrock.com/weekly-commentary

Public vs. private

We prefer private to public credit long term on better return potential. It’s the mirror image in equity: We prefer public stocks as risks fade in the medium term.

Market backdrop

US stocks hit 2023 highs on hopes for a debt ceiling deal. Yields climbed on odds of another rate hike versus a pause or cuts. We don’t see rate cuts this year.

Week ahead

US PCE this week will help gauge inflation’s persistence. We see wage pressure from worker shortages keeping inflation above policy targets for some time.

The banking tumult has reshaped opportunities for income: We now favor private over public credit on a strategic horizon of five years and longer. We think private credit could help fill a void left by banks pulling back on some lending and offer potentially attractive yields to investors. We see a mirror image in equity, strategically preferring public to private: Public stocks have repriced more than markets like private equity, and we see risks fading over a medium-term horizon.

Paragraph-2,Image-1,Paragraph-3
Key Points-1,Paragraph-4,Advance Static Table-1,Paragraph-5,Advance Static Table-2,Paragraph-6,Advance Static Table-3

Yield appeal

Credit bond yields, 2016-2023

The chart shows that yields in direct lending, a subset of private credit, have risen, while U.S. high yield and investment grade (IG) credit yields have faded from highs.

Source: BlackRock Investment Institute, with data from Lincoln International and Barclays Live, May 2023. Notes: The chart shows yields for direct lending, US high yield debt, US investment grade credit. The indexes used are: Lincoln Senior Debt (based on valuation data from 2017–2022), Bloomberg US Corporate High Yield 2% Issuer Capped Index and Bloomberg US Credit Index. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index.

Investing in private markets takes time. So we see the repricing in private credit as an opportunity to be nimble with our strategic views and tap into our expectation that private credit can help fill a lending gap left by banks after the recent turmoil. Yields in direct lending, a subset of private credit, have risen (dark orange line in chart). These higher yields may better compensate investors for the risks we see ahead – even after factoring in lower credit quality. US high yield and investment grade (IG) credit yields have faded from highs (yellow and pink lines), but we think they will rise eventually. We go overweight private credit as a result and move to neutral on global IG. Private markets overall are complex, with high risk and volatility, and aren’t suitable for all investors.

Private credit appeal

The fallout from the banking sector troubles and further tightening of credit conditions adds to the pressure on public credit but could be a potential boon for private credit, in our view. We think the rising interest rate environment and increased competition for deposits will put pressure on banks – and cause them to pull back some lending. We see this making room for non-bank lending and private credit to play a greater role.

Private credit refers to a wide range of investments, from direct lending to infrastructure and venture debt. We’re focused on direct lending – financing that is typically negotiated directly between a non-bank lender and a borrower, often a small to mid-sized company. This private credit is mostly made up of floating rate debt that adjusts with policy rates that we see staying high. We think there are potential benefits from a borrower’s perspective in seeking out non-bank lending. Dealing with one private lender could be easier than a broad group of banks as in public markets. The private nature could also help avoid spooking financial markets, such as with the risks that come with tapping funds from public markets at inopportune times. This demand from borrowers creates an investment opportunity for lenders, in our view: more attractive pricing and deal terms than would have been the case before. But we think seeking out quality borrowers is key: That means a keen eye on deal terms and lending standards. We have had a conservative view on our assumptions about private credit default losses in our strategic views for some time because private credit is not immune to the credit risk from an economic downturn. Yet even after allowing for these more prudent assumptions that would be a drag on returns, the wider set of opportunities for private lenders in the wake of the banking fallout, coupled with the divergence between private and public credit yields is enough to spur an upgrade.

Our strategic view on equities is the mirror image of credit: We prefer public to private. We’re still strategically overweight developed market (DM) equities but underweight on a six- to 12-month tactical horizon because a strategic investor can look past some of the near-term pain. And the pressure from tighter credit conditions is also likely to have relented down the road. We remain strategically underweight growth private markets such as private equity. Private equity has started to reprice the tougher macro environment but not as much as publicly traded equities.

Our bottom line

We see the appeal of income in the new regime of greater macro and market volatility and favor private over public credit on a strategic horizon. We see a mirror image in equity, strategically preferring public to private.

Market backdrop

US stocks hit 2023 highs last week on hopes for a debt ceiling solution. Yields climbed on expectations the Federal Reserve could hike rates again instead of pausing at its next meeting. First-quarter earnings contracted for the second-straight quarter – but less than expected. Inflation helped revenue and margins as firms passed on higher prices to a still-strong consumer. We think higher financing costs and dwindling savings could start to bite: Earnings expectations look too rosy.

We’re watching US PCE closely this week, the preferred inflation gauge of the Federal Reserve. We expect inflation to remain above 2% policy targets for some time – that’s why we don’t see the Fed cutting rates this year. Global PMIs will help us gauge how much interest rate hikes are hitting economic activity in developed markets.

Week ahead

The chart shows that European equities are the best performing asset year-to-date among a selected group of assets, while Brent crude is the worst.

Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Refinitiv Datastream as of May 18, 2023. Notes: The two ends of the bars show the lowest and highest returns at any point in the last 12-months, and the dots represent current year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in US dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, ICE US Dollar Index (DXY), spot gold, MSCI Emerging Markets Index, MSCI Europe Index, Refinitiv Datastream 10-year benchmark government bond index (US, Germany and Italy), Bank of America Merrill Lynch Global High Yield Index, J.P. Morgan EMBI Index, Bank of America Merrill Lynch Global Broad Corporate Index and MSCI USA Index.

May 22

Euro area consumer confidence

May 23

Global flash PMIs

May 24

UK CPI

May 26

US PCE inflation

Read our past weekly commentaries here.

Investment themes

01

Pricing in the damage

Recession is foretold as central banks try to bring inflation back down to policy targets. It’s the opposite of past recessions: Rate cuts are not on the way to help support risk assets, in our view.

02

Rethinking bonds

Fixed income finally offers “income” after yields surged globally. This has boosted the allure of bonds after investors were starved for yield for years. We take a granular investment approach to capitalize on this, rather than taking broad, aggregate exposures.

03

Living with inflation

The Federal Reserve is likely to stop its rapid rate hikes without inflation being back on track to return fully to 2% targets, so we think we are going to be living with inflation.

Directional views

Strategic (long-term) and tactical (6-12 month) views on broad asset classes, May 2023. 

Legend Granular

Note: Views are from a US dollar perspective. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any particular funds, strategy or security.

Our granular views indicate how we think individual assets will perform against broad asset classes. We indicate different levels of conviction.

Tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, May 2023.

Legend Granular

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a US dollar perspective. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.

Euro-denominated tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, May 2023. 

Legend Granular

Asset Tactical view Commentary
Equities    
 Europe ex UK Europe ex-UK: tactical Underweight -1 We are underweight. We don’t think consensus earnings expectations are pricing in heightened risks of a deep recession. We see a sharp hit to euro area growth from the energy price shock alone. The European Central Bank looks intent on squeezing out inflation via policy overtightening, making a recession likely.
Germany Germany: tactical Underweight -1 Valuations are supportive relative to peers, but near-term headwinds to earnings prospects remain significant. They include uncertainty on energy supply, rapid ECB tightening and slower growth in major trading partners. Looking further ahead, opportunities may arise from political ambitions to bring the economy to net zero.
France France: tactical Underweight -1 We are underweight. Relatively richer valuations and a potential drag to earnings from weaker consumption amid higher interest rates offset the positive impact from past productivity enhancing reforms, favorable energy mix and boost to the luxury sector from China's near-term reopening.
Italy Italy: tactical Underweight -1 While valuations and earnings trends are attractive versus peers, the economy’s relatively weak credit fundamentals amid a global tightening financial conditions keep us cautious.
Spain Spain: tactical Underweight -1 The market’s outperformance in 2022 – driven largely by its greater relative exposure to rate-sensitive financials – leaves it vulnerable to profit-taking amid a broader, regional downturn, in our view.
Netherlands Netherlands: tactical Underweight -1 The earnings outlook has weakened more than in other European markets, resulting in a negative earnings outlook over the next 12 months. Dutch stocks are trading at a comparable valuation but offer a relatively low dividend yield.
Switzerland UK: tactical Neutral We are overweight. We hold a relative preference. The index’s high weights to defensive sectors like health care and non-discretionary consumer goods provide a cushion amid heightened global macro uncertainty. Valuations remain high versus peers and a strong currency is a drag on export competitiveness.
UK UK: tactical Underweight -1 We are underweight. We see UK activity contracting as explicitly acknowledged by the Bank of England – and yet not reflected in consensus earnings expectations. The market has outperformed other DMs in 2022 due to energy sector exposure flattered by a weaker currency – and is not immune to a global downturn.
Fixed income    
Euro area government bonds Euro area government bonds: tactical Underweight -1 We are underweight. We expect the ECB to keep tightening even after the recession has started. Global trend of higher term premium being priced in should also push long term yields up. We see inflation coming down to target only very slowly and tight monetary policy remains a risk to peripheral spreads.
German bunds German bunds: tactical Underweight -1 The ECB is likely to keep overtightening policy even after a recession starts, while inflation is likely to return close target only very slowly. The new investment regime of higher macro volatility globally should translate into higher risk premia for holding long term government bonds, a trend from which Germany will struggle to decouple from.
French OATs Italian BTPs: tactical Underweight -1 We are neutral. Valuations look compelling compared to peripheral bonds, with French spreads to German bonds hovering above historical averages. Elevated French public debt and a slower pace of structural reforms remain headwinds.
Italian BTPs Italian BTPs: tactical Underweight -1 BTP-Bund spread is too tight given the weakening in Italy’s credit fundamentals and a now negative current account balance. Yet a relatively prudent fiscal stance from the new government should keep any spread widening limited, with investors compensated by the higher carry of Italian government bonds.
Swiss government bonds Swiss government bonds: tactical Neutral We prefer Swiss bonds relative to euro area bonds. The Swiss National Bank has quickly hiked policy rates back to positive. Further upward pressure on yields appears limited given global macro uncertainty, still relatively subdued underlying inflation and a strong currency. We don’t see the SNB hiking rates as much as the ECB.
UK gilts UK gilts: tactical Underweight -1 We are underweight. Gilts won’t be immune to the factors we see driving DM bond yields higher. We prefer short-dated gilts for income.
European inflation-linked bonds European inflation-linked bonds: tactical Neutral We turn neutral. We see euro area inflation falling to the ECB target over a multi-year period, supporting breakeven pricing, but policy tightening into a recession is a headwind to the asset class.
European investment grade credit European investment grade credit: tactical Overweight +2 We are overweight European investment-grade credit. We still find valuations attractive in terms of both overall yield and the spread, especially when considering the lower duration compared with US credit.
European high yield European high yield: tactical Neutral We are neutral. We find the income potential attractive, yet prefer up-in-quality credit exposures amid a worsening macro backdrop.

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a euro perspective, May 2023. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.

Wei Li
Global Chief Investment Strategist – BlackRock Investment Institute
Vivek Paul
Head of Portfolio Research – BlackRock Investment Institute
Amanda Lynam
Head of Macro Credit Research – BlackRock Alternatives
Devan Nathwani
Portfolio Strategist – BlackRock Investment Institute

This material is for distribution to Professional Clients (as defined by the Financial Conduct Authority or MiFID Rules) and Qualified Investors only and should not be relied upon by any other persons.

Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: 020 7743 3000. Registered in England No. 2020394. For your protection telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited.

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Capital at risk. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.

Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

© 2023 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, iSHARES, BUILD ON BLACKROCK and SO WHAT DO I DO WITH MY MONEY logo are registered and unregistered trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.