Questor , The Telegraph's investing column, takes a weekly view of the markets – what is moving them, what lies ahead and how all of this could affect your portfolios and financial goals.
Stock markets are treading water. The prices of metals, energy and grains are all rising. And the bond markets are in turmoil, with government bond prices dropping amid concerns over sticky inflation , the sustainability of government borrowing levels in the West and competition for capital from AI companies.
All of this may be no more than a classic summertime funk, which could end as everyone slopes back to their desks. After all, this Saturday is the 250th year of the world's oldest classic horse race, which often marks the trigger for a stock market gallop towards the year-end. As the old saying goes: "Sell in May, go away and come back again on St Leger Day."
Take a step back, however, and the ebbs and flows across the different major asset classes this year could be indicative of a wider change. Look back to the 2010s , which were characterised by low inflation, low growth, and low interest rates. Now the picture seems quite different, with higher inflation, higher nominal growth and higher interest rates – and greater volatility across all three.
If this change persists, the logical conclusion is that the asset classes which did best and worst in the past decade could switch places.
All change
Such a swap could mean outperformance from commodities, cyclical and "value" shares, and therefore underperformance from bonds and assets such as technology companies – hard to believe as this may be at the moment.
I also believe private equity and private credit could be affected.
There can be no doubt that both these asset classes have served investors well over the past 10 or 15 years, and provided strong total returns.
The investment case rests upon how private markets funds are not subject to so-called "hot" and "cold" money flows. This is because, so the theory goes, there are required long holding periods, and private markets managers have the ability to take long-term decisions that can benefit businesses and their earnings power, and broad portfolios over a range of industries that provide diversification .
More than a decade of cheap debt – which funded a wave of takeovers and buoyant stock markets, and provided an exit for private equity sellers in the form of stock market flotations – helped, too.
All of these factors are now coming under greater scrutiny.
First, interest rates and bond yields are rising, making deal-making more expensive at a time when equity valuations are higher. This means bargains are harder to find, and thus returns that compensate for higher interest payments are more difficult to accrue.
Second, stock markets are not pliantly providing private equity firms with easy exits.
The IPO market remains relatively quiet, or at least fixated on a narrow number of firms and industries – notably those related to AI, the very industry which is seen to be attacking the software companies that are a key holding in many private equity funds.
Third, companies do not need to rely as heavily on private markets for borrowed capital as they once did. The banks have restructured themselves back to health, benefited from a normalisation of interest rates and even persuaded regulators to cut them some slack so they can start to take some risk again.
New sensation
Two spectacular private-credit-backed accidents in the US last year did not go unnoticed by investors, in the form of failed auto parts company First Brands and subprime auto lender Tricolor.
Investors who took the view that there is never just one cockroach, and those failures were a sign of trouble to come, have since begun to baulk at rules that limit their ability to redeem their investment when they wished to do so, with some private market collectives allowing a cap on withdrawals up to a maximum of just 5pc of a fund's value each quarter.
The price chart for the S&P Listed Global Private Equity Index is starting to show some strain despite such limits, and hopes that the interest rate-hike cycle may be nearing its peak .
This benchmark tracks the share prices of a basket of well-established private market specialists, including Blackstone (BX:NYSE), Brookfield (BN:NYSE), 3i (III), KKR (KKR:NYSE) and Apollo (APO:NYSE).
Chart watchers could be forgiven for thinking the index topped out a year ago, just as First Brands and Tricolor were tottering and markets began to question the combination of leverage (or debt) opacity and complexity that defined their corporate structures.
The illiquidity of the underlying assets within private markets' funds layered on top of that, as a further risk factor for investors to consider.
