The vigilantes aren’t back – yet. But the United States’ fiscal position is worse and the spectre of inflation has returned, and this time they would have a much stronger case, according to Ruffer’s Steve Russell.
With three separate businesses now combined under the Insignia banner, MLC Asset Management CIO Dan Farmer says his focus is no longer on “fixing problems” but on driving returns – and he’s looking to niche asset classes to do it.
Time to pick your targets in private markets: Federated Hermes
Uncertainty around the US election and the course of interest rates has given way to an extended equity market rally, with exuberant investors finally getting comfortable with the macroeconomic backdrop.
Private equity has “followed suit”, according to Brooks Harrington, Federated Hermes’ CIO for the asset class, with improving metrics across deal flow, credit availability, and exit strategy. But the flood of money that has poured into private equity over the years means big investors will now have to take a more targeted approach to it.
“Private equity is now a mature asset class and investors need to pick their spots in order to continue generating investment returns in line with expectations,” Harrington said. “The lower end of the market continues to be an exciting area that is less efficient, less competitive, less intermediated, with significant opportunity for needle moving operational value add to help companies reach scale and reward investors with outsized investment returns.”
The so-called “democratisation” of private equity will also continue, with the wealth and retail markets the industry’s “largest opportunity for raising new capital”. Cross-border investment in China “remains muted” due to geopolitical uncertainty, but other countries in the region – including India and Japan – will see flows, while Europe’s lead on addressing climate change presents a significant investment opportunity. But it’s the artificial intelligence thematic that Federated Hermes thinks will be driving most new deal activity.
“Whether AI represents full scale technological revolution or productivity enhancement on the margin and under what timeline will continue to be debated,” Harrington said. “Separating the hype from reality will be important for investors. Regardless, technology and innovation will continue to present some of the most attractive investment opportunities across the US.”
In private debt, both direct lending and real estate debt are “set to have excellent years”, according to Patrick Marshall, Federated Hermes’ head of private credit. But investors “must stay disciplined”, with the more conservative strategies expected to flourish.
“With continued geopolitical and economic risks on the horizon, in the form of weaknesses in many of the European economies and the threat of potential tariffs by the US on some European companies, the focus by investors will continue to be on low risk direct lending strategies which should be better suited to manage this uncertainty,” Marshall said.
“Whilst defaults will continue to increase in the short term on the back of high interest rate costs, we expect this to stabilise as interest rates start to fall more significantly. Conservative and disciplined lenders should enjoy a strong year in direct lending as transaction volumes increase.”
Meanwhile, the UK government is creating new strategic funds and bodies to supercharge domestic infrastructure investment amidst “intense competition for global capital”. That’s a big green light for investors wanting a piece of attractive sectors like renewable energy, data centres and battery storage, but questions linger about whether the government’s efforts will pay off.
“Delivering the next generation of infrastructure required to decarbonise the economy whilst adapting to the long-term impacts of climate change requires creating entirely new markets and investment models,” said Perry Noble, head of infrastructure at Federated Hermes.
“The Autumn Budget contained positive signals for these new sectors, but the detail and execution will determine whether they can attract the private capital needed for them to thrive. For those investors able to identify these sectors and access proprietary opportunities, there is potential for significant returns.”
