Unscripted: What markets are missing on private credit, AI and income

It’s hard to find much pessimism in today’s markets. That said, Loomis Sayles’ fixed income experts think markets may be misjudging risks in public and private credit markets while overlooking AI-driven productivity gains and opportunities to collect carry.

Public and private credit misunderstandings

Investors may be making overly simplistic judgments about public versus private credit, creating opportunities for active managers.

Pramila Agrawal: “I think one area where the markets are overly pessimistic is private credit. The stress has been concentrated in business development companies (BDCs) and their non-traded funds. That sector is a smaller portion of the private credit landscape and I don’t see systemic risk. In the private credit space, I think there’s a tendency to conflate liquidity risk with credit risk. Yes, private instruments are less liquid than public bonds, but that doesn’t mean that the underlying credit is weaker. There’s a lot of new participants in the private credit market that has to come to grips with the fact that it’s a less liquid sector. I think there will be some normalization as some of those participants exit and the buyer base stabilizes.”

Underappreciating the potential long-term benefits of AI

While markets focus heavily on AI-related risks, some of our managers see greater potential for productivity gains and economic benefits than current sentiment suggests.

Matt Eagan: “I think some pockets of the market have been too pessimistic about AI’s effect on employment. AI will likely change the economy meaningfully, and some jobs and companies will become obsolete. But I’m an optimist. I think new businesses and occupations will emerge and job growth will continue. Many companies, including those that have been put in the “penalty box” over AI, can use AI to continue to grow, potentially creating new markets.”

Pramila Agrawal: “I’ve noticed that when new AI technology is perceived to be disruptive to any sector, even mildly, the stocks in that sector tend to fall like dominoes. It seems the impact of AI on labor, productivity, and on companies in general is not fully understood yet. And I think some sectors are being penalized when they may actually do okay. On the other hand, some of the hyperscalers may not be able to monetize their technology as expected. It depends on where you look – you see exuberance in some places and pessimism in others.”

Underestimating income and carry opportunities

Some investors may be too focused on valuation concerns and not focused enough on the income available in today’s yield environment.

Jennifer Thomas: “As an investor in securitized assets, I think people are underappreciating the role of carry in driving total return. Yes, spreads are tight, but don’t forget about the high carry with high income that securitized assets can offer (and typically with a discount relative to corporate bonds).”

Scott Service: “As a global bond investor, I like to look for areas of value, where people might be a little pessimistic. A few local government bond markets look somewhat attractive to us, particularly Brazil and New Zealand. We think these markets have favorable risk/reward balances and attractive yields relative to underlying fundamentals.”