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Market weekly – Private debt stands out amid the uncertainty (read or listen)

Uncertainty over the macroeconomic landscape and the outlook for monetary policy currently combine with an awareness among investors that by many measures,…

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This article was originally published by BNP Paribas Asset Managment Blog ( Investor's Corner)

Uncertainty over the macroeconomic landscape and the outlook for monetary policy currently combine with an awareness among investors that by many measures, valuations in public markets are on the high side. David Bouchoucha, head of our private debt and real assets team, talks about the characteristics that make private debt an attractive alternative.   

Listen to the podcast or read the article below:

Private debt – Standing out in uncertain times

Historically, private debt has delivered diversification, stable income streams and consistent premium returns over liquid and traditional debt, with modest drawdowns over the long term.

These are uncertain times, so we believe it makes a lot of sense to think about what we know to be certain. What is certain today is that with conventional asset classes either offering next-to-no yield (bonds) or priced close to perfection (equities), the search for yield remains the main challenge for investors.

In this environment, private debt offers an attractive liquidity premium over public markets. In addition, most of the assets we invest in offer floating rather than fixed interest rates. As investors, we are therefore primarily taking credit risk rather than interest rate risk. Floating interest rates offer protection against rising interest rates.  

This is not to say that our asset class is without risk. Currently, the reflationary environment leads us to look closely at the business risks of companies in our investment universe. For example, we look particularly closely at exposure to commodity prices.

Our investment process for selecting the companies in which we invest requires us to make sure a business is not overly exposed to commodity markets in this climate. We are looking for those segments that are the most resilient.

Innovation in private debt

The Covid-19 pandemic has had a profound impact on many of the companies in our investment universe and for many it has long-term consequences.

Innovation occurs at different levels. Our investment process has not changed substantially. We continue to look closely at the risk to which an individual company is exposed and the strength of its balance sheet.

Innovation comes into play in other areas. For example, when we invest in loans, we can invest in different parts of a company’s structure. In the past, we focused on senior debt financing. Today, we are looking more at junior debt when we finance a corporate or an infrastructure project.

This is because we increasingly see transactions where the sponsors are not looking at financing at senior debt or equity, but at junior debt. In our view, this part of the capital structure offers attractive yields at a level of risk that we see as compelling on a relative value basis for our investors.

Relative value is important to us. When we consider financing a particular company or infrastructure project, one of the most important questions is which part of the capital structure is most attractive on a risk/return basis. We are developing our capabilities for financing junior debt because this segment is growing fast and we see a lot of relative value for investors in this part of the capital structure.

Integrating ESG criteria into our processes  

Since the launch of the private debt and real asset team in 2017, the integration of environmental, social and governance (ESG) criteria has been a central element of our investment process.

The SFDR [1] regulation is something of game changer. It forces all managers to structure their approach and ensure they comply with the regulation whose criteria become part of the rules in the prospectus governing a fund. That means the force of contractual law backs the regulation. We see this as a positive development because it ensures a manager adheres to the investment approach laid out in the prospectus.

Let me give you a concrete example. When we manage infrastructure, we do so with a specific measurement from an external service provider who calculates the net environmental contribution of each investment. This enables us to compare the environmental profile of a particular project with whatever is possible in the universe. With this metric, we can even verify whether a particular project is aligned with the Paris agreement in terms of carbon emissions.    

The dispositions of SFDR are another step on a journey, which will enhance and legally provide for our commitment to sustainable investing.

Selective exposures in commercial real estate  

Real estate market activity was hit significantly in 2020, although capital values held up relatively well. This market offers a deep and broad opportunity set. Commercial real estate offers depth that means we as investors can identify resilient assets at attractive valuations.

For example, logistics real estate is a fast-developing sector offering investors good value. It is a strong sector compared to others that are more vulnerable to the changes wrought by the pandemic. Hotels and retail assets have suffered in particular.

We also see prime office space as resilient. There has been a repricing of prime office space. This translates into an improvement in the security and relative value of the assets.

Commercial real estate represents the characteristics of private debt well in that there are risks, but also attractive opportunities for experienced investors who can identify the best borrowers and keep credit risk at manageable levels. Our teams are able to identify the opportunities through their knowledge of the factors affecting each sub-sector.

[1] For more on this topic, read An introduction to the Sustainable Finance Disclosure Regulation – Investors’ Corner ( 

Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher than average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity, or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

Writen by David Bouchoucha. The post Market weekly – Private debt stands out amid the uncertainty (read or listen) appeared first on Investors' Corner - The official blog of BNP Paribas Asset Management, the sustainable investor for a changing world.


All Eyes On Inventory

You’ve heard of the virtuous circle in the economy. Risk taking leads to spending/investment/hiring, which then leads to more spending/investment/hiring….

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You’ve heard of the virtuous circle in the economy. Risk taking leads to spending/investment/hiring, which then leads to more spending/investment/hiring. Recovery, in other words.

In the old days of the 20th century, quite a lot of the circle was rounded out by the inventory cycle. Both recession and recovery would depend upon how much additional product floated up and down the supply chain. Deflation, too.

On the contraction side, demand might fall off a bit for whatever reason(s), retailers getting stuck with a small inventory overhang. If they think it more than temporary, or don’t have the internal cash to finance it, the retail level scales back pushing inventory to wholesalers who then cut orders from producers.

Serious enough, producers begin to cut back their own activities, maybe to the point of forgoing new hires, perhaps laying off some workers already employed. Whatever necessary to equalize reduced order flow with cost structure and input utility.

When those layoffs hit, almost certainly it cuts further into demand (unemployed workers are far more careful and constrained consumers), more inventory stuck at retailers and wholesalers, then even fewer orders for producers who must sharpen their payroll axe all over again. This vicious cycle is what used to make up the balance of any recession.

But what if inventory first accumulates for other reasons?

It may be a different look to the cycle, though not necessarily an entirely different outcome. Suppose retailers (outside of automobiles) grow concerned about supply availability or shipping times. They might naturally react by boosting their current order flow if only to increase their chances some product makes it through the clogged shipping channels.

As that increased order flow unrelated to demand continues to move back through the supply chain, it probably would only make the transportation issues that much worse. It’s already a mess, and because it’s already a mess the entire supply chain tries to stuff more goods through it rather than less, rather than giving the system some time and space to work out enough kinks.

This, of course, would probably convince retailers to do it all over again, ordering even more they don’t need now or in the near future, now more desperate to try and raise their chances of receiving anything. More trouble for the shippers and so on.

Having intentionally over-ordered, and then over-ordered again (and again?), this time what happens when the logistics get more sorted out and then deliveries rather than trickle through come pouring out? This is the cyclical question for early 2022, not the unemployment rate.

Some companies have said they are ready, and have confidently declared how they will be able to manage holding such excessive levels of product. Maybe they can. But what happens to orders down at the lower reaches? Having received all this extra inventory, retailers and wholesalers aren’t going to keep double and triple ordering.

Before even getting to demand considerations, the orders are going to drop and producers are going to become less busy. The inventory glut having been forwarded up to the retail level, maybe wholesale, it will have to be worked down over time.

This is where demand comes into it. If demand stays as robust as some might currently assume, it might not take that much time to normalize inventory, then get past the whole issue and imbalance with nothing much lost.

And if demand isn’t as good, then we’re right back into the 20th century again.

The way the supply bottlenecks of 2021 have worked out, there is going to be an inventory overhang at some point. When it does come about and how bad it will be, that’s really the demand question. There seems to be quite a bit of optimism about it, to the point of complacency while corporate CEO’s bark in the media instead about all the massive inflation they plan on throwing your way.

Inflation today (therefore not inflation) but potentially too many goods tomorrow. However the inventory cycle manifests, the one thing each would have in common is its trough – disinflationary at the least.

Manufacturing PMI’s, for what it’s worth, remain elevated as if the upward segment of that unusual cycle remains relatively intact (note: ISM for September won’t be released for another week). With ships still stacking up on the US West Coast, this makes sense. Regardless of current levels of demand, these supply problems would only feed the imbalance for another month.

IHS Markit’s manufacturing index retreated again for the flash September 2021 estimate, but it remains above 60 therefore still in the post-2008 stratosphere. At 60.5 in the latest update, it is down, though, for the second month in a row since hitting the high of 63.4 back in July. And the index was 62.6 back in May, meaning it’s been four months treading.

It is the services side which has materially declined, leading many to assume it must be due to delta COVID if goods flow is largely uninterrupted at the same time. Markit’s services PMI dropped to 54.4 in September from 55.1 in August, while its employment component fell back to just 50.

This meant the composite, accounting for both manufacturing and services, declined to a very similar 54.5. Using this measure as a guide for possible GDP in Q3, that’s working down to a very disappointing 3% or less which might otherwise raise suspicions when it comes to the sustainability of demand.

If this more serious setback really is pandemic-related, then thinking it a temporary one might keep up the order flow as well as the logistical nightmare. Then the artificial inventory cycle gets even more artificial.

It could very well be that manufacturing remains high because of inventory and not because current potential weakness is only about delta.

Should it turn out to be unrelated, or only somewhat attributable to renewed disease measures, then inventory stops being a pesky annoyance of shipping bottlenecks and potentially starts being more like its old self. While that wouldn’t necessarily mean recession in early 2022, even a substantial downturn (chances would have it globally synchronized) having yet fully recovered from the last two would be enough trouble.


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This Has To Be A Mistake

This Has To Be A Mistake

While we were digging through the data for today’s household net worth report we stumbled upon something that seem…

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This Has To Be A Mistake

While we were digging through the data for today's household net worth report we stumbled upon something that seem beyond ridiculous: the ratio of Household Net Worth to Disposable Net Income. At 786% in the latest quarter, the chart at first appears to be a mistake but we triple checked it, and... well, here it is.

The latest, all-time high print is an increase from 698% in Q1 and also represents the biggest quarterly increase in history!

This number is so ridiculous, it is almost 50% higher than the long-term average of 540%. More importantly, it means that the total net worth number we reported earlier today, which in Q2 hit a record high of $142 trillion, is massively inflated on the back of what is obviously the biggest asset bubble on record.

It also means that if one were to strip away the asset bubble, and net worth was purely a reasonable function of disposable income, then total net worth worth be haircut by 31%, or some $43 trillion, which incidentally, is equivalent to the net worth of the top 1% of US society...

... and which as we showed earlier today is a record 32% of total household net worth.

As an aside, the fact that the top 1% have gained $10 trillion in wealth since the covid pandemic outbreak, is probably just a coincidence, and yet...

As for the chart which clearly has to be a mistake, we are sad to report that it isn't, and as politicians of both the Democrat and Republican party pretend to fight for the common man, all they are doing is enabling and accelerating the greatest wealth transfer in the world but not for nothing: they too want to be in the top 1%.

Tyler Durden Thu, 09/23/2021 - 22:00
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“Culture As An Asset”

#CKStrong Stunning. Hedge funds hoovering up trading cards as an “alternative to equities” with the same passion Brooks Robinson hoovered up ground…

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Stunning. Hedge funds hoovering up trading cards as an “alternative to equities” with the same passion Brooks Robinson hoovered up ground balls.

This is usually a sign of the endgame for markets, i.e,, the precursor to a bear market. Think the “Great Beanie Baby Bubble” of 1999.

In general, there are two types of assets,

  1. They can be rare—gold bars, diamonds, houses on Victoria Peak, bottles of 1982 Pétrus, Van Gogh paintings, stamps, beanie babies, or baseball cards or
  2. They can generate cash flows over time  – GaveKal

Creating An Illusion Of Scarcity

Scarcity relative to the money stock is what its all about now, folks. 

It probably won’t be long before the Fed has to bailout the baseball card market, no?

Full disclosure,  I do own a Mike Trout rookie card

Given the extreme valuations of all most all asset classes, coupled with the massive amount of money in the global financial system, markets are now really stretching, looking for, and actually attempting to create scarcity as a useful delusion to justify, rationalize, and drive speculation. 

Maybe I will start collecting poop as an “anthropological asset,” put it the blockchain and super charge the price ramp by snapping a few pictures of each sample, converting them to NFTs to load up to the internet.

Then again, maybe all this is signaling the start of a big, big inflation cycle and the markets are looking to get out of cash and protect their purchasing power.   But that’s too rational.  

Can you believe what markets have become, folks?   It is hard to see clearly when everybody is making money. 



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