Currently, the Fed is projecting additional cuts by the end of 2025. Of course, the path of future cuts depends on what the data indicate about the strength of the economy. Therefore, we think it’s instructive to revisit three often-discussed scenarios for the economy, and what each means for credit markets.

Today, we believe the soft- and no-landing scenarios are the most probable. In those environments, it is critical for investors to seek to maximize income to drive portfolio returns, without relying on long duration positioning that would require further rate declines to boost performance. Against this backdrop, there are a few key considerations concerning the outlook for private credit going forward.

Yields are still attractive. Despite the recent rate declines, private credit yields have held up, indicating that investors are being paid to be patient. Additionally, in a no-landing scenario, absolute yields in private credit would likely remain elevated. At the same time, spreads would likely compress; but given a murkier backdrop of the pace and size of future cuts, floating rate assets should continue to benefit from historically elevated central rates. For investors conscious of maintaining higher yields, we believe private credit remains an attractive asset class.

Managing duration is key. Now that aggressive rate cuts are priced in, it’s particularly prudent to avoid extending duration (sensitivity to interest rate fluctuations) too much. If the economy remains strong, these rate cuts may not materialize as currently expected, particularly in the no-landing scenario, where there is a risk that investors repeat the mistakes of early 2023 and 2024, when aggressive interest rate cuts were priced in but failed to materialize, given the strength of the economy, disappointing those relying on duration as a primary return driver. 

Private credit consists primarily of floating rate loans. Thankfully, private credit characteristically consists of floating rate loans, which can help mitigate some of the negative effects of duration volatility in a portfolio. The yield on floating rate coupons moves in sync with interest rate movements, which better protects the current value of the loan’s coupon payments, resulting in lower price volatility than fixed rate loans. 

The bottom line: It’s also worth noting that in the most likely scenarios—a soft- or no-landing scenario—spread compression would likely be prevalent and felt across all fixed income assets; in other words, a full-scale repricing of the fixed income landscape. But private credit yields remain at about 11% today, which is still well above other fixed income asset classes. Meaningful illiquidity premium remains, and, against a backdrop of a soft-/no-landing economy, a shift to more liquid assets might not be necessary for long-term investors. Relative to other fixed income alternatives, in this scenario, private credit would continue to provide investors attractive income.

A WORD ABOUT RISK
Investments in real estate-related instruments may be affected by economic, legal or environmental factors that affect property values, rents or occupancies of real estate. Infrastructure companies may be subject to a variety of factors that may adversely affect their business, including high interest costs, high leverage, regulation costs, economic slowdown, surplus capacity, increased competition, lack of fuel availability and energy conservation policies.
Alternative investments often are speculative and include a high degree of risk. Investors could lose all or a substantial amount of their investment. High-yield bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally, the longer a bond’s maturity, the more sensitive it is to this risk. Yields are subject to change with economic conditions. Yield is only one factor that should be considered when making an investment decision.
The information in this publication is not and is not intended as investment advice, an indication of trading intent or holdings, or prediction of investment performance. Diversification does not guarantee a profit or protect against loss. Views and information expressed herein are subject to change at any time. Brookfield disclaims any responsibility to update such views and/or information. This information is deemed to be from reliable sources; however, Brookfield does not warrant its completeness or accuracy.
Opinions expressed herein are current opinions of Brookfield, including its subsidiaries and affiliates, and are subject to change without notice. Brookfield, including its subsidiaries and affiliates, assumes no responsibility to update such information or to notify clients of any changes. Any outlooks, forecasts or portfolio weightings presented herein are as of the date appearing on this material only and are also subject to change without notice. Past performance is not indicative of future performance, and the value of investments and the income derived from those investments can fluctuate.

FORWARD-LOOKING STATEMENTS
Information herein contains, includes or is based on forward-looking statements within the meaning of the federal securities laws, specifically Section 21E of the Securities Exchange Act of 1934, as amended, and Canadian securities laws. Forward-looking statements include all statements, other than statements of historical fact, that address future activities, events or developments, including, without limitation, business or investment strategy or measures to implement strategy, competitive strengths, goals, expansion and growth of our business, plans, prospects and references to our future success. You can identify these statements  by the fact that they do not relate strictly to historical or current facts.
Words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and other similar words are intended to identify these forward-looking statements. Forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Many such factors will be important in determining our actual future results or outcomes. Consequently, no forward-looking statement can be guaranteed. Our actual results or outcomes may vary materially. Given these uncertainties, you should not place undue reliance on these forward-looking statements. It is not intended to provide an overview of the terms applicable to any products sponsored by Brookfield Corporation and its affiliates (together, “Brookfield”). Information and views are subject to change without notice. Some of the information provided herein has been prepared based on Brookfield’s internal research, and certain information is based on various assumptions made by Brookfield, any of which may prove to be incorrect. Brookfield may not have verified (and disclaims any obligation to verify) the accuracy or completeness of any information included herein, including information that has been provided by third  parties, and you cannot rely on Brookfield as having verified any of the information.
The information provided herein reflects Brookfield’s perspectives and beliefs as of the date of this commentary.

INDEX PROVIDER DISCLAIMER
The quoted indexes within this publication are unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment. There may be material factors relevant to any such comparison, such as differences in volatility and regulatory and legal restrictions between the indexes shown and any investment in a Brookfield strategy, composite or fund. Brookfield obtained all index data from third-party index sponsors and believes the data to be accurate; however, Brookfield makes no representation regarding its accuracy. Indexes are unmanaged and cannot be purchased directly by investors.
Brookfield does not own or participate in the construction or day-to-day management of the indexes referenced in this document. The index information provided is for your information only and does not imply or predict that a Brookfield product will achieve similar results. This information is subject to change without notice. The indexes referenced in this document do not reflect any fees, expenses, sales charges or taxes. It is not possible to invest directly in an index. The index sponsors permit use of their indexes and related data on an “as is” basis, make no warranties regarding same, do not guarantee the suitability, quality, accuracy, timeliness and/or completeness of their index or any data included in, related to or derived therefrom, and assume no liability in connection with the use of the foregoing. The index sponsors have no liability for any direct, indirect, special, incidental, punitive, consequential or other damages (including loss of profits). The index sponsors do not sponsor, endorse or recommend Brookfield or any of its products or services. Unless otherwise noted, all indexes are total-return indexes.

INDEX DEFINITIONS
The Preqin Infrastructure Index captures in an index the return earned by investors on average in their private infrastructure portfolios, based on the actual amount of money invested in private capital partnerships. Each data point is individually calculated from the pool of closed-end funds for which comprehensive performance data is held, as of both  the start and end of the quarter.
The Preqin Real Estate Index captures in an index the return earned by investors on  average in their private real estate portfolios, based on the actual amount of money  invested in private capital partnerships. Each data point is individually calculated from the pool of closed-end funds for which comprehensive performance data is held, as of both the start and end of the quarter.
The Preqin Private Equity Index captures in an index the return earned by investors on average in their private equity portfolios, based on the actual amount of money invested in private capital partnerships. Each data point is individually calculated from the pool of closed-end funds for which comprehensive performance data is held, as of both the start and end of the quarter.
The Cliffwater Direct Lending Index (CDLI) seeks to measure the unlevered, gross of fee performance of U.S. middle market corporate loans, as represented by the asset-weighted performance of the underlying assets of Business Development Companies (BDCs), including both exchange-traded and unlisted BDCs, subject  
to certain eligibility requirements.
The FTSE EPRA Nareit Developed Real Estate Index is an unmanaged market- capitalization-weighted totalreturn index that consists of publicly traded equity REITs and listed property companies from developed markets.
The FTSE Global Core Infrastructure 50/50 Index gives participants an industry-defined interpretation of infrastructure and adjusts the exposure to certain infrastructure subsectors. The constituent weights are adjusted as part of the semi-annual review according to three  broad industry sectors: 50% Utilities; 30% Transportation, including capping of 7.5% for  railroads/railways; and a 20% mix of other sectors including pipelines, satellites and telecommunication towers. Company weights within each group are adjusted in proportion to their investable market capitalization.
The ICE BofA US High Yield Index tracks the performance of U.S.-dollar-denominated below-investment-grade corporate debt publicly issued in the U.S. domestic market.  
The ICE BofA Merrill Lynch Global High Yield European Issuers Non-Financial 3% Constrained Ex Russia Index is a sub-index that contains all securities in the broader index except those from financial issuers or with Russia as their country of risk but caps issuer exposure at 3%. The index is rebalanced monthly. The dex is USD hedged.
The MSCI World Index is a free-float-adjusted market-capitalization-weighted index that is designed to measure the equity market performance of developed markets. 

© 2024 Brookfield Corporation 

ID B-637978