Private Credit In Focus

This is an excerpt from the full monthly report which goes deeper into how private credit is navigating key macro or market themes, current insights from our 4 Private Credit platforms, and the landscape of the global private credit asset class.

Waiting on the lag

After one of the most aggressive monetary tightening campaigns in the history of central banking, market participants are waiting on the full effects to permeate through global economies culminating in a recession. Policy makers have highlighted that a slowing of policy hikes may be warranted due to stresses of regional banking cases and tightening lending standards. Additionally, the levels of notable recession indicators such as the Conference Board’s Leading Index and the inversion of global sovereign yields curves provide credibility to the prospect of a near term recession. Whether or not a recession materializes, our base case for 2023 is for a period of below trend growth.

A main focus for policy makers is inflation, specifically, ‘supercore’ inflation, which excludes the impact of energy and housing prices. Yet, even noting the improvement we’ve seen in inflation, this key inflation metric is still double the pre-pandemic level. For example, the U.S. ‘supercore’ inflation is down from 6.5% in September 2022 to 5.1% at last print, but still above the pre-pandemic average of ~2%.¹ Additionally, with positive financial markets performance year to date, this has offset some of the effect of monetary tightening. Case in point, U.S. financial conditions are at the same level as when the Federal Reserve began their current rate hiking cycle. A similar story can be seen in the United Kingdom. ²

As we attempt to balance the narratives from multiple economic and market indicators, we maintain our call that central banks will not cut interest rates in the second half of 2023 despite the market pricing in cuts. Nonetheless, as allocators, this creates a complex investing environment as we invest into a downturn. On the public and private credit side, this still argues for focusing on quality. Note, that quality is nuanced and does not always align with the typical rating classifications. In private credit, we continue to be active with our portfolio companies to monitor the revenue and earnings outlook and/or to understand their liquidity needs.

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