2023 Fall Market Outlook

Anastasia AmorosoAdvisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

With the race to year-end now upon us, I share my thoughts on why, despite the recent reset and higher rates, I still see several reasons for market optimism for the remainder of the year.

My top five ideas are: distressed private credit, buyout private equity, opportunistic real estate, macro hedge funds, and structured investments.

1. Private credit: Distressed investing

After the steep rise in interest rates in 2022 and the first half of 2023, and with the Fed funds rate increasing to its highest level since July 2007,1 companies are facing the prospects of higher interest payments. As a result, over-levered companies are now encountering a difficult environment to service or refinance their debt. This creates the potential for an increase in the number of defaults for the remainder of 2023 and into 2024.

Signs of credit stress are already emerging, with the failures of several regional banks, highlighting the potential effect of increasing and elevated interest rates. Cracks in regional banks also have serious knock-on effects as lending standards tighten across the financial system, making refinancing maturing debt difficult for highly levered companies. In addition to the recent stress and uptick in defaults, Fitch Ratings’ 2023 U.S. Leveraged Finance (LevFin) default forecasts for high-yield loans rose from 3–3.5% in January 2023 to 4.5–5% in their May 2023 report (Exhibit 5).2 Given the significant growth in the credit markets since the global financial crisis, even a moderate increase in default rates can create an enormous opportunity for distressed investing. Investors may want to prioritize this segment of the market in 2023 to add diversification and enhance the return and income potential of their portfolios.