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JPMorgan Asset Prefers Real Estate and PE to Direct Lending

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(Bloomberg) -- Private credit may be all the rage among investors, but there are better alternatives, according to JPMorgan Asset Management.

Amid signs of a turnaround in commercial real estate, opportunities exist in commercial mortgage-backed securities, non-traded real estate investment trusts and direct investment vehicles, said Gabriela Santos, the $3.3 trillion asset manager’s chief market strategist for the Americas.

She also notes potential to invest in single family and industrial real estate, as well as infrastructure debt and equity.

“For that marginal dollar, to us, real estate and private equity are a bit more interesting,” Santos said in the latest Credit Edge podcast. Those asset classes have repriced on higher rates, while private credit hasn’t, she added. 

Click here to listen to the full interview with JPMorgan’s Santos. 

Private debt has swiftly ballooned to a $1.6 trillion asset class that could be much bigger when asset-based finance is included. While many buyers are happy to sacrifice liquidity and transparency for higher returns, some large portfolio managers have said there’s not enough of an extra return over publicly traded debt to justify taking the additional risk.

That said, JPMorgan is still seeing a lot of interest in private credit, especially from private wealth clients. Santos says direct lending yields about 10% on average, compared with 7.5% on public junk bonds and roughly 8.5% on leveraged loans. 

She values the proximity to borrowers that private markets afford, providing the option to amend and extend loans through periods of stress. 

“Having that personal relationship with direct lending and private credit more broadly, actually, is something that’s helpful, not just for the borrower but also for the investor,” said Santos.

While debt agreements are getting amended and extended more, they remain “within the bounds of normal,” according to Santos, who expects private debt to do well as long as the US economy and earnings remain solid. 

Santos expects public credit spreads to stay tight and equities to hold at all-time highs on steady economic and earnings growth. Interest-rate volatility and higher yields amid inflation and fiscal concerns could boost spreads, but a supply-demand imbalance is also supportive, she added. 

“We’re likely to continue seeing a lot of demand for credit from institutional [investors] and more and more from individuals,” said Santos. “We still think next year can be a year where you have more demand than actual issuance.” 

The US economy’s soft landing — a scenario where the Fed can cool inflation while avoiding a recession — has spurred investors to take more credit risk. But Santos draws the line at single B rated bonds, the second lowest ratings bucket. 

“I don’t think it’s the environment to be looking at triple Cs — it’s not that kind of nirvana economy,” Santos said, referring the lowest-quality bonds. “That’s still where you are likely to see a mild increase in defaults.”

On the podcast, Santos also discussed:

  • Retail sector stress
  • Opportunities in regional mid-size US banks
  • Dollar strength and rates volatility
  • Market risks from US tariffs on Canada and Mexico
  • Investing in Japan and India as alternatives that are less exposed to trade wars
  • The US debt and deficit trajectory

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