Over the course of 2023 and the first half of 2024, equity markets rose steadily, driven by positive economic and earnings news, a technology boom driven by AI-related firms, and the recently confirmed expectation that the U.S. Federal Reserve (Fed) would begin to cut rates at some point in the near future. One consequence of such a strong rally is that the equity risk premium, the expected excess return that compensates an investor for the risk of investing in equities, hasn't been this unfavourable since 2001 (see chart).
Source: Bloomberg, as of August 31, 2024. Equity Risk Premium is the expected excess return that compensates an investor for the risk of investing in equities; it is defined as the S&P Earnings Yield (reciprocal of the P/E ratio) minus the yield on the current 10-year U.S. Treasury. The indexes are unmanaged and cannot be purchased directly by investors.
The narrowing of the equity risk premium occurs at a time when investing in credit is quite appealing, a result of a "new normal"–with elevated yields not seen in decades–after the Fed began hiking interest rates in 2022.
In this new environment, credit assets have produced strong results: for example, the yields of the high yield bond and senior loan markets have increased meaningfully in the last few years, without sacrificing quality. Meanwhile, defaults have remained below recessionary averages, partly as a result of refinancing activity that has extended the maturity wall. Until recently, the Fed has remained hands-off regarding rates, refraining from cutting them while inflation remained sticky and growth was strong.
In short, credit may offer competitive relative value in the current environment, as Howard Marks noted in his Sea Change memo (December 14, 2022):
This content is brought to you by Investment Week in association with Brookfield Oaktree Wealth Solutions. By clicking "Learn More" you agree to the data protection statement below.
DATA PROTECTION STATEMENT
Your privacy policy – Please read carefully
We set out below how and the basis under which we, Incisive Media*, will communicate with you. In our Privacy Policy we explain how we may use your data.
For subscriptions, events, sponsored content and resources, we will use the lawful basis of 'legitimate interests' and we will use the contact details supplied to us to market to you regarding your trial or subscription, reader research, events and other related products. You will always be offered the option to change your contact preferences.
Where you request a whitepaper or content published by one of our third party partners or attend a sponsored event which Incisive Media hosts, we will identify the third party or sponsors to you at the time and then pass on your contact details to them. They will contact you directly and their use of your data will be governed by their own privacy policy. Events may attract additional sponsors after bookings have opened and after the date you have signed up to attend, but we will identify all sponsors to you by email before the event.
Please note that if you are a sole trader or other partnership, you will not receive information regarding Incisive Media's other brands or from third parties until such time as we have your consent.
Brookfield Oaktree Wealth Solutions - IMPORTANT DISCLOSURES All investing involves risk. The value of an investment will fluctuate over time, and an investor may gain or lose money, or the entire investment. Past performance is no guarantee of future results. As an asset class, private credit comprises a large variety of different debt instruments. While each has its own risk and return profile, private credit assets generally have increased risk of default, due to their typical opportunistic focus on companies with limited funding options, in comparison to their public equivalents. Because private credit usually involves lending to below-investment-grade or non-rated issuers, yield on private credit assets is increased in return for taking on increased risk. ©2024 Brookfield Corporation; ©2024 Brookfield Asset Management Ltd.; ©2024 Oaktree Capital Management, L.P.; ©2024 Brookfield Oaktree Wealth Solutions LLC; and ©2024 Brookfield Public Securities Group LLC. Brookfield Oaktree Wealth Solutions LLC and Brookfield Public Securities Group LLC are indirect majority-owned subsidiaries of Brookfield Corporation. The information contained herein is for educational and informational purposes only and does not constitute and should not be construed as an offer to sell, or a solicitation of an offer to buy, any securities or related financial instruments. This commentary discusses broad market, industry or sector trends, or other general economic or market conditions, and it is being provided on a confidential basis.
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. This communication 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 also 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 S&P 500 Index is an equity index of 500 widely held, large-capitalization U.S. companies
