Market Outlook 2023 and beyond

Private Debt Boutique

KATCHING OPPORTUNITIES

We focus on senior secured direct lending strategies with short durations that offer stable and attractive returns, protection and liquidity.

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This year has been a very challenging year for investors with equities and bond falling close to 20% each on an aggregated level. The main reasons have been high inflation, rising rates, geopolitical risk and the anticipation of a recession in most major economies. The correlation between stocks and bonds has been positive, which means that traditional portfolio diversification has not provided any type of protection. There are only few assets that performed positively, such as Commodities, Managed Futures and Direct Lending.

The outlook for 2023 does not look much rosier.  Inflation remains elevated and the path towards major central banks’ target inflation levels does not appear reachable. Inflation will come down, thanks to higher rates and an economic contraction, but the disinflationary path is taking much longer than initially expected. Also, geopolitical tensions are likely to persist and it remains unclear how deep the recession will be. This might create additional volatility for equities. Only once the market starts to look through the headwinds, in anticipation of an economic recovery, a more sustainable recovery in equity markets is possible. This might happen towards the end of 2023. In the meantime, investors are well advised to focus on high quality assets with strong cash flows, combined with some inflation hedges.

The yields of fixed income securities have improved and 2023 will be a better year for bond investors, as the rate hike cycle is getting close to a top, or at least a temporary pause. We recommend investors to focus on quality, as credit spreads might widen in a recessionary environment. In the longer term, however, we remain relatively cautious on the fixed income asset class. Inflationary pressures will abate, but this might be only temporary. There are still inflationary forces that might push inflation back up, as a consequence of the potential economic recovery after the recession. The main inflationary drivers remain the transition to alternative energy (“decarbonization”), geopolitics and protectionism (“deglobalization”) and the fact that an aging population with a rising number of people exiting the labor force (“demographics”). Therefore, we do not advise investors to take on too much duration risk in the longer term.

In a longer period of structurally higher inflation, it is likely that the correlation between stocks and bonds remains elevated. They are likely to correct and recover at the same time. Therefore, it is important for investors to include a higher percentage of alternative asset classes and inflation hedges into their asset allocation mix. For conservative investors, we continue to recommend high yielding short-duration strategies within private debt that combine liquidity, transparency, downside protection, diversification, cash flows and non-correlation to traditional asset classes.

Katch Investment Group focuses on short-term lending areas where capital supply is scarce, specifically areas where traditional banks are no longer competing due to regulatory constraints. The lack of competition means that it is possible to charge high interest rates, and more importantly, to get strong guarantees and collaterals to protect the loan principal. We apply a conservate approach when valuing the assets that protect the loans, and apply low loan-to-value ratio. This means that even in an economic downturn, the capital is well protected. More recently, the lending market has further dried up, which means that Katch can be even more selective when choosing its investments. The projects that are funded typically combine strong value creation and low risk, that are less dependent on the economic cycle. This is often the case in thematic areas, such as investments related to the alternative energy transition and ESG. In addition, the short duration of the loan book, the absence of leverage, inflation protection and the active currency hedging means that the Katch funds continue to offer attractive, resilient and uncorrelated returns with a strong cash flow generation in any economic and market environment.

 

Disclaimer: The Katch Funds are solely reserved to professional and qualified investors as per MiFid II. Past performance should not in any circumstances be taken as an indication of future performance. The value of the money invested in the fund can increase or decrease, as a result of currency fluctuation and there is no guarantee that all of your invested capital can be redeemed. Investors and prospective investors should refer to the official documents of the Fund, including the Private Placement Memorandum, for further information about the risk of investing in this investment fund.

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