Leading Indicators | Unlocking opportunity: the rise of private credit
Discover key economic and financial metrics, and what to look out for in the week ahead.
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PRIVATE EQUITY, PUBLIC DEBATE
Private credit has been in the spotlight over the past month, since featuring in the IMF’s latest Global Financial Stability Report. The contention is that the opacity of the market could be storing up future vulnerabilities.
Private credit, in which non-bank lenders offer credit access to institutions and private clients alike, has grown rapidly in recent years. According to the IMF, private credit assets reached c.$2.1 trillion globally in 2023, but heavily concentrated in the US. The retrenchment of traditional banks from the commercial real estate (CRE) space potentially opens up a significant opportunity for private credit.
Meanwhile, messaging in the UK has been mixed. The Bank of England (BoE) has expressed concerns over the banking sector’s exposure to private equity borrowers, only for these concerns to be downplayed by the Financial Conduct Authority. The debate continues.
A STRONGER SPRING?
Later this week, the Bank of England will make its interest rate decision, with both economists and money markets expecting no change from its current rate of 5.25%. Despite this, UK business confidence has strengthened. The Lloyds Business Barometer held steady for a second month with a net balance of 42% in April, surpassing the survey’s long-term average of 28%. Additionally, Lloyds Economic Optimism rose to 39%, its highest level since February 2022. This optimistic outlook is further reflected in Deloitte’s latest CFO survey. Sentiment among UK CFOs rose for the third consecutive quarter in Q1 2024, and uncertainty has fallen to a two-and-a-half-year low, back to levels seen in summer 2021. As business optimism rises, we may see a pick-up in leasing activity in H2 2024.
FLUCTUATIONS IN THE YEN
The yen dropped to a 34-year low of ¥160 against the dollar last week, continuing its devaluation against the world reserve currency. It has since appreciated to ¥153. While the yen is down -1.86% against sterling over the week, it has appreciated by +7.91% YTD. The UK therefore remains relatively attractive in terms of pricing, for Japanese investors. Over the past year, we have seen increased investment from Japanese buyers, as they take advantage of a significantly lower cost of domestic debt. Japanese investment into the UK increased by +314% y/y in 2023. Despite the recent currency fluctuation, we expect Japanese capital to remain active throughout 2024.
The broader picture is that currency fluctuations are becoming more significant as the Fed appears to be waiting longer ahead of its first rate cut this cycle.
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