Iran Risk Looms, but Markets Don’t Capitulate

0:00I'm San Vitas on the floor of the New York Stock Exchange. Let's welcome in our next guest now, Shanali Bassa Akuzi, chief investment strategist at I capital, Shanali, lovely to have you on the program. Obviously, I know you've been at future proof this week. And while it's very sunny down there, a potential black cloud sort of hanging over that event, obviously with the events in Iran right now. How are you in the team thinking about that? And what was the nature of some of those conversations? Certainly a lot of clouds over the market right now. You're looking at a third straight week of declines in the S&P 500, but to put it in a perspective, you are still just below 6700. And you're still above the 200 day moving average. You haven't really seen what you would call capitulation yet in the market. And so sentiment has to flush out a little bit more before people will be comfortable and putting more chips on the table. But what we're saying is create your shopping list, figure out what has been sold off with the market so that when people do get more comfortable, when investors are comfortable to get back in both in public and private markets,

1:02that they can be ready to do so. But I want to point out there's considerable uncertainty. Brent was back above 100 just today. Now, when you looked at Sunday night, that just incredible volatility that you saw in the oil market, you can say that some of that was momentum driven. It was on really thin liquidity. What we are trying to do is be really rational about the direction of travel here. So we're not talking about sustained oil prices above 100. We're trying to really assess how high oil prices could say, say 85 to $95 about barrel and how long, and what type of spillover effect that will have, not just to inflation, but also to consumer sentiment. Remember, we didn't really love the consumer sector already. This is just more about what we believe. The broader market will be able to absorb in terms of the continued uncertainty. Yes, I mean, this has really been a catch up trade that we have seen in that particular sector. I mean, you know, you speak of some of that pullback that we've seen in certain sectors.

2:03I mean, we've seen an average member drawdown. I believe in double digits. And so, you know, stuff's on sale right now. And I know you and I have talked about that before and spoken about that at length. I'm just wondering about the timing then, Shanali. I mean, when do you know to get into the market? When every day we are dealing with headline after headline and it feels like we take one step forward, two steps back. You know, one thing that struck me pretty immediately about this war breaking out in Iran, I think when the first order effect, you had a lot of investors saying, well, markets see through geopolitical uncertainty. Well, this is the math of the stock market. Yes, it tends to go higher. By the way, the supply of public companies in that market has also been shrinking over time. So math gets you to a higher level eventually. But in the near term, when do we see a comfortable place to start dipping in and taking on some risk assets? I think that's the bigger question here, Sam,

3:05because we are looking at a war that we don't really actually know at the end of the day. How long it's gonna go on? What the retaliation really looks like at the end of the day across critical assets, in terms of oil infrastructure, how much production will go offline if there continues to be storage that is filled up? How will other routes be calculated for the oil flows across the world? These are some of the critical questions in the near term that need to be worked out. And it's why when we look at the markets, people are looking at equities falling, but equally look at bonds falling. Just take a look at the two year and 10 year yield since the war broke out. And you could see that across the curve, there has been a rise of roughly a third of a percentage point higher in interest rates. You're already seeing mortgage rates even feel the pressure of that. So above oil prices, prices at the pumpy even starting to rise in the United States, you're also seeing the effect on mortgages as well. And so the consumer's gonna feel that.

4:05And that uncertainty needs to work its way through, you also have to take a mega step back, don't you? Because this has been a three year bull market, people have been tactically dashing to cash a little bit here, and that does not surprise me. It hasn't actually happened at a massive scale. And so the moves here are, in my view, orderly and logical, given how much uncertainty that we do have in the market today. And if we weren't talking about the war in Iran right now, we'd probably be blaze of focus, Shanali on the private credit risk. And obviously that's been a big theme. I know you've been writing about it a lot, a lot of great coverage of that. And I mean, we've got more red flags in this market today, Cliffwater, Morgan Stanley, Deutsche Bank, Blue Owl. I mean, choose your adventure with the headlines this morning. Just talk us through how you and the folks at I & Capital are actually thinking about this particular event right now. So it's really interesting, Sam, if you looked at the fourth quarter of redemption data, you could have seen pretty clearly what the first quarter was gonna look like.

5:07So we actually had kept the map of every redemption date that was happening through the end of March. And you kind of would get a sense, well, okay, if these dates are coming up and sentiment is so muted, we already in the fourth quarter had the scenario where redemption requests were getting kind of close to that 5% limit. Now what is misunderstood by much of the market, which is either looking at this from the outside in and actually not much of the people that are asking about this are not invested in private credit at all yet. They are looking at a market that's grown very meaningfully over the last several years and saying, well, okay, what does this market look like when redemptions are elevated? We do have some notes of history to walk us through what this would look like in the longer term. If you have elevated redemptions, you take B-REAT, for example, in 2022, it takes about 14 months. It took them 14 months to get below that 5% redemption limited and get back to 100% of redemptions to investors.

6:08So in the scenario of private credit, we would estimate that it would take about a year to get below that level once again and return 100% of redemption requests that are being asked for. Now again, I want to be very clear about this. Those 5% limits exist for a reason. People think about this as gating, as some scary thing in the market, but these are illiquid funds that are only offering a small degree of liquidity to investors for reasons like rebalancing, for example, or one-off gifts or taxes that high net with clients tend to have, but they should have never really been thought of as very liquid because they are not, and the underlying is not. I think HPS put it well when they decided to stick to that 5% limit, and right by the way, this is a fund that has a meaningful amount of liquidity baked into it, that 5% limit they said is foundational to investors. And I think that that coming out of this period

7:09is going to be the most important learning for investors that that 5% limit is generally the limit when it comes to the redemption limits that these types of private vehicles and other types of private market vehicles have. Yeah, it's something to watch. And I mean, we went through a whole segment without talking about the macro data as well, which I think really says it all doesn't it, Shanali. We have to leave it there. Thank you so much for your time today. Really appreciate it. As always, Shanali Baffek, there, who's the Chief Investment Strategist over at iCapital.