Market review Q3 2023*
During Q3 2023 traditional asset classes delivered weak performance, with Global Equities down 3.4% and Global government bonds down 2.9%**. Consequently, the 60/40 balanced portfolio lost 3.2% during Q3. The yield on 10-year German government bonds increased during Q3 from 2.4% to 2.8%. Alternatives performed relatively well in this context. Alternative credit posted strong total returns in Q3 as elevated interest rates drove coupon income higher while credit default rates remained relatively low. Corporate direct lending was up 3.3%, followed by Structured credit (+2.8%) and Corporate distressed debt (+1.1%). Real assets continue to see a repricing of their asset valuations due to higher interest rates (and inflation), leading to mildly negative total returns in Q3, with Private Real Estate equity (-0.8%), Private Infrastructure equity (-1.2%), and Private Farmland (-0.8%). Private Equity delivered +0.6%.
Macro-economic outlook for 2024
For H1 2024, we expect macro uncertainty and relatively high interest rate volatility to prevail. We expect growth to decelerate further, and contrary to the markets’ narrative of a ‘soft landing’, to a mild recession in the US and Europe, with a recovery in the latter part of 2024. While inflation continues to face upward pressure from longer-term structural trends such as demographics and sustainable transitions, we expect it to moderate further in the next quarters given the cycle. Central banks are likely done hiking rates but the path for base rate cuts remains uncertain. Meanwhile geopolitical tail risks are increasing, from Ukraine to the Middle East. Once macro uncertainty fades later in 2024, greater certainty on borrowing costs could drive a stabilization in valuations, and subsequently improve transaction activity (a release of dry powder and more exits).
Asset class outlook (6-12 months’ horizon)
Within Alternative credit, we have a constructive view on Structured credit and Corporate distressed debt, while we have a neutral view on Corporate direct lending. Within Real assets, we have a constructive view on Private infrastructure and Private Farmland but remain cautious on Private Real Estate equity. We remain careful with Private equity, although we note that private equity funds could benefit from lower entry valuations.
* Alternatives’ indices are typically released with a one-quarter time lag due to their less liquid nature.
** Global Equities: MSCI ACWI Net Total return USD index; Global government bonds: ICE BofA Global government bond index (W0G1).