Displaying items by tag: rates

Declining inflation rates have ignited a bullish frenzy in the equity markets after a turbulent start to 2024. Financial experts highlight the pivotal role played by waning price pressures in propelling the recent stock market surge. 

Fueled by promising inflation trends and the burgeoning artificial intelligence sector, analysts have revised their year-end targets upwards for major stock indices like the S&P 500. Consecutive record highs across key benchmarks reflect investors' optimism, bolstered by lower-than-anticipated inflation readings. 

Economists interpret the recent data as a harbinger of potential interest rate cuts, marking significant progress towards the Federal Reserve's 2% inflation target. While the Fed projects a solitary rate reduction in 2024, market sentiment leans towards two cuts. 

Finsum: The key will be how many cuts, if rates fall the cap to the market is very high.

While commercial properties values have struggled mightily this year KKR is trying to instill shareholder confidence in its $1.2 billion private real estate investment trust. KREST’s struggles are not in isolation as many REITS have faced a two-year downturn due to rising interest rates and decreased investor capital. 

To counteract this, KKR announced a shareholder priority plan involving the potential cancellation of up to 7.7 million KREST shares if the net asset value per share drops below $27 by June 2027. This move would increase per-share value by reducing the number of outstanding shares. Additionally, KKR affiliates will inject $50 million of new capital into KREST, demonstrating their commitment to the trust and the real estate market.

 KKR's strategy mirrors actions taken by Blackstone last year, aiming to protect non-KKR shareholders from short-term declines while allowing them to benefit from potential real estate recoveries.

Finsum: While commercial real estate has most likely bottomed out, its still tough to say if it will ever recover or if this is the new normal. 

There are increasing concerns that a crisis is brewing in commercial real estate (CRE), as over the next couple of years, $2 trillion in CRE loans will need to be refinanced. Previously, there were hopes that macro conditions would soften, leading to lower rates and a more favorable lending environment. Instead, inflation has proven to be more resilient than expected, and expectations of Fed dovishness have been dialed back.

In addition to high rates, major challenges include decreasing demand for offices and rising vacancies, a stricter lending environment, and balance sheet woes at regional banks, which traditionally account for a large share of CRE lending. However, there is significant variance within the CRE market. Areas like data centers, hotels, and industrial buildings continue to show strength, while retail and multifamily exhibit more mixed performance.

If conditions worsen, there is a risk of spillover effects on the broader economy, including decreased lending activity due to losses at banks, lower tax revenue for local governments due to more vacancies and lower property values, and subsequent declines in hiring. However, the consensus continues to be that there won’t be a full-blown crisis as the sector is sufficiently diversified and continues to have strong credit performance despite adverse conditions.

Finsum: Investors should pay attention to the CRE market given the refinancing cliff and challenges posed by higher rates and a stricter lending environment. 

According to Lindsay Rosner, the managing director of multi-sector fixed income investments at Goldman Sachs, fixed income is presenting investors with an attractive opportunity to lock in high yields without compromising on quality. There are some challenges given divergences in central bank policy around the world and increasing uncertainty about the timing and direction of the Fed’s next move. Overall, the firm believes that the status quo of ‘higher for longer’ is likely to prevail.

A major factor is inflation, and the economy proving to be more resilient than expected. As a result, the market is now expecting two quarter-point rate cuts before the end of the year, compared to expectations of 150 basis points in cuts entering the year. The next Fed decision is on July 29. Prior to that meeting, there will be considerable amounts of inflation and labor market data, which could impact its thinking, although the current expectation is for it to hold rates steady.

With rates at these levels, there is increased risk that consumer spending is affected or that a higher cost of capital begins to impact corporate profitability and hiring. This risk increases the attractiveness of fixed income, especially as many investors are looking to rebalance given strong equity performance. Rosner sees opportunity in higher-quality areas such as investment-grade corporate bonds and structured products with AAA or AA ratings, especially given an impressive carry differential over Treasuries.

Finsum: Goldman Sachs sees opportunity in higher-quality segments of the fixed-income market. It believes investors should lock in yields at these levels, given the risk that high rates will eventually sour the economic outlook. 

According to panelists at the SALT conference, private credit will continue to experience strong growth over the next few years. Additionally, they believe that reports of banks stepping in to more aggressively compete with private credit lenders are overblown. Instead, there’s more likely to be partnerships between private credit investors and banks in terms of originating deals and arranging terms.

Michael Arougheti, the co-founder and CEO of Ares Management, sees private credit compounding at an annual rate of 15% for the next decade. He sees growth driven by cyclical and secular factors such as companies staying private for longer, the current high-rate environment, and many ‘good’ borrowers with weak balance sheets. Another factor is the billions being raised for private credit funds across Wall Street. 

Panelists also agreed that there are many selective opportunities in fixed income and credit at the moment. And more opportunities should emerge over the next year, especially with rates staying higher for longer. Arougheti believes that there will be more opportunities created by the lack of liquidity. This underscores another difference between the current environment and past cycles for distressed debt - weakness is not sector-specific, rather, it’s more rate-induced. 

Finsum: At the SALT conference, panelists agreed that despite headlines, private credit markets will see strong growth over the next few years. They also see more attractive opportunities emerging given high rates and limited liquidity.