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Weekly commentary

Privately protect against economic erosion

Saira Malik
Chief Investment Officer
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Bottom line up top:

While economic growth has remained surprisingly strong in 2023, we see reasons to expect a slowdown next year.
CIO weekly commentary chart 2

Portfolio considerations


One investment area to consider is private credit, where deal flow has picked up materially over the last couple of months. Private equity firms that were sitting on the sidelines have jumped back into action as inflation continues to decline and the U.S. Federal Reserve signals that additional rate hikes are likely not needed. As for private equity middle-market direct lending, our analysis shows deal volume reached $19.6 billion in the third quarter, up 12% from the second quarter. We believe deal activity will remain robust. Furthermore, private credit fundamentals remain sound. The Proskauer Private Credit Default Index (a gauge of the health of the traditional middle market) showed the default rate declining to 1.4% in the third quarter, a second consecutive quarterly decrease.

Since the Fed initiated its aggressive rate-hiking cycle in March 2022, private credit has benefited from the floating rate nature of the asset class. Our analysis shows middle market loans are currently yielding approximately 12%, and even if a couple of rate cuts materialize in the second half of next year, we expect that yield will remain in double digits. We also think private credit should be able to withstand an economic slowdown. Per our analysis of Moody’s data, since 1995, middle market loans have had a default rate of 4.0%, with a recovery rate of 77.5%, leading to an annual loss of 0.9%. That’s less than half the annual loss of broadly syndicated loans and high yield bonds (Figure 2). Even if defaults slowly creep up, we think they’ll remain well below their long-term average, providing a tailwind for private credit.

As for specific private credit sectors, the challenges facing consumers next year make us wary of cyclical, consumer-oriented areas such as retail and restaurants. Instead, we favor opportunities in the business services sector, which is less exposed to discretionary spending. For example, consulting firms that provide design support for infrastructure projects make attractive borrowers. Municipalities hire these companies to design and engineer facilities or systems that provide essential services, for which demand tends to remain steady — even in an economic downturn.

CIO weekly commentary chart 2 
Private credit markets (particularly middle market direct lending) should be an area well-positioned to withstand an economic downturn.

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:

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