Key takeaways

• Secondaries represent a growing a vital part of the private equity ecosystem, providing liquidity, diversification, and potentially shortening the distribution period.
• Commercial real estate debt may be an appealing way to take advantage of some of the challenges impacting real estate.
• While the office sector has been generating the headlines, private real estate represents a diverse set of options, and sectors like industrials, multifamily, and life sciences look attractive today.  
   

Executive summary

Global markets have had a strong start to 2024. The S&P 500 Index was up 14.5% through the first six months of the year, led by technology and growth companies. Global equity markets have also exhibited strong returns. Developed markets, as exhibited by the MSCI EAFE Index, finished up 3.5%, measured in USD, while the MSCI Emerging Markets Index was up 6.2%. Performance within fixed income markets is more subdued, with the Bloomberg US Aggregate Bond Index flat through June. Bond investor optimism that the Federal Reserve (Fed) would cut interest rates multiple times in 2024 has been tempered. As a result, yields have moved higher over the course of 2024.

Stronger than expected global growth, robust earnings reports, and enthusiasm about Artificial Intelligence (AI) have helped drive markets. Global risks and tensions remain, however. While signs of disinflation have emerged, the inflation rate remains above the Fed’s target. Ongoing wars in the Middle East, Eastern Europe, and growing tensions in Asia, have provided reasons for caution. Political uncertainty remains, with dozens of national elections slated to occur in the back half of 2024, most notably in the United States.

2024 economic outlook

We expect the economy will continue to slow in 2024 but avoid a global recession. While growth will be slower in the US than last year, real GDP growth above 2% is possible, and that will help the US and other major economies avoid a hard landing. Inflation should continue to moderate but it is unlikely to reach the Fed’s 2% target this year. The Fed is likely to begin easing monetary policy towards the end of this year by reducing the Federal Funds Rate, potentially three cuts before year-end. While the Fed may move rates lower over the next twelve months, we believe that rates will not revert to the near-zero levels of the post-GFC period, but rather stay relatively elevated.

US and global economies have been resilient in the face of the tightest monetary policy in decades. This is partly due to many having taken advantage of low interest rates in the years preceding the recent rise. Fiscal stimulus launched by governments across the globe to counter pandemic slowdowns helped sustain consumption levels. At some point, higher borrowing costs and diminishing consumer savings may lead to softening demand. A key risk is that the Fed may be slow to recognize this softening, and thus will keep rates too high for too long, leading to a harder landing than many currently expect.

For equities, positive real economic growth can help buoy earnings, but investors must keep an eye on how those earnings compare to the high expectations set today. We believe softening in consumer spending and in the labor market are likely, and inflation should show progress in moving closer to the Fed’s 2% target. In this environment of slow growth and slowing demand, we favor high quality securities in public markets, and look to take advantage of opportunities we see in the private markets as well.

Read more here: Alternative Investments Mid-Year Outlook | Franklin Templeton