Why private market exposure can be good for investors

May 20, 20223 min read
Why private market exposure can be good for investors
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Key takeaways

  • Inflation measures in the U.S. remain elevated, signaling that price increases have yet to peak.
  • Markets remain volatile amidst monetary policy tightening affecting growth stocks, China’s zero-COVID policy, and persistent geopolitical risk.
  • While alternative investments can be particularly helpful in this market cycle, they are a source of diversification and potentially better returns no matter the external circumstances.

Inflation measures in the US remain elevated

Last week, the CPI (Consumer Price Index) – a measure of consumer spending, but it’s not as accurate and comprehensive as PCE (Personal Consumption Expenditures) – came out higher than expected, signaling that inflation has yet to peak in the US. 

Analysts continue to expect PCE to come down to 3.5% in Q3 and 3.25% in Q4 due to a decrease in supply-chain driven inflation – especially in durable goods. However, service sector inflation is expected to remain steady at just over 4% because the labor market is strong and wage pressures are likely to remain firm for a while. 

Our sense is that if these forecasts are correct, the Fed is expected to hike 50 basis points in the next two meetings, and then revert to 25 basis point hikes in September. But there is a lot of uncertainty. 

Markets remain volatile

The recent acceleration in monetary tightening, which is projected to continue, has had a negative effect on equities, and particularly on growth stocks, which have long been retail investor favorites. Since tech companies are prominent components of major US indexes, equity markets are likely to be choppy until there’s clarity on medium-term inflation expectations, and therefore on the path of Fed tightening. 

In addition, the Russia-Ukraine war is causing an increase in the prices of wheat, fertilizer, gas, oil, and the Chinese zero-COVID policy that led to a lockdown in one of its major financial and port hubs (supply shortage). Some of the knock-on effects from the war are also still to be factored in.

Why private markets work

Investors may feel like they have nowhere to hide, especially in this market cycle. But exposure to alternative investments can have several potential positive effects: 

  1. In volatile markets, it can decrease investor inclination to try to time the market. As investors take comfort in the liquidity of secondary markets – for equity and public fixed income – they tend to succumb to various types of investment biases. These can lead to suboptimal trades – many investors tend to sell the dip due to herding behavior – as well as to an increase in trading expenses which reduces returns and ultimately compromises the ability to compound, which is crucial to wealth creation. 
  1. Regardless of cyclical market swings, It can help differentiate sources of risk-return. The graph below clearly shows the benefits of adding alternative investments to a more traditional equity-fixed income exposure. While the data shown includes hedge funds in the alts bucket – which Yieldstreet does not offer on its platform – it is a compelling visual of the potential advantage of investing in private markets.