Swim with central banks, not against them

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There’s an audible groan in the economy when interest rates go up. Particularly in South Africa where many consumers are overindebted, an interest rate hike is seen as economic punishment. But for those investors who understand that yield means opportunity, a high interest rate environment continues to offer a way to tilt your portfolio strategy towards yield-focused alternative investments.

Put differently, increasing interest rates are bad news for some asset classes and great news for others. The art of investing and portfolio management is about knowing when to swim with the central banks and when to swim against them. Stocks unfortunately don’t only go up, which is why an equity-only portfolio is seen as risky and inappropriate in all but the most extreme economic circumstances of practically zero rates.

The days of zero and even low rates are firmly behind us and won’t be coming back for the foreseeable future. Central banks around the world are determined to bring inflation rates down to within acceptable ranges. With every economic problem looking like a nail, central banks must take out their favourite tool: the hammer. That hammer has been a series of interest rate hikes – 14 in succession in the UK, for example, before a merciful hiatus in September this year. This brings UK interest rates to their highest level in 15 years.

Growth projections have been lowered for the UK economy, with inflation remaining elevated at the 5.6% p.a. mark in October 2023. Not only does this hurt many consumer-facing businesses with limited pricing power, but it also negatively impacts the investment case for many assets which have become a mainstay in client portfolios, such as real estate. It’s becoming trickier to find attractive investment opportunities in this environment, with entry price being the key.

Central banks tend to take their lead from the Federal Reserve in the United States, commonly referred to as the Fed. Interest rate forecasts in the market are as volatile as the rate decisions themselves, so it is unwise to put too much faith in trying to guess the outcome of each meeting. Investors would do well to simply recognise the clear trend, which is that the US economy is much stronger than the South African economy and that the Fed is likely to keep rates higher for longer, putting emerging markets like ours under pressure. This isn’t good news for the Rand, which thus isn’t good news for the global wealth of South African citizens.

Have you perhaps noticed the relative increase in Chinese and Japanese cars on South African roads, at the expense of mid-market German sedans? It’s hard not to attribute the reason to the destruction of South African wealth in global terms. Imported European cars are far less affordable than they were a decade ago, with very little economic growth in South Africa to suggest that this trend will change.

At the centre of the Venn diagram of South African economic stagnation and global central bank policy, we find the appeal of private debt investments in hard currency. Now managing in excess of R3 billion in investments from predominantly South African investors and with a five-year track record of performance, the Westbrooke Yield Plus senior secured private credit fund is resonating with investors seeking an enhanced cash yield.

Westbrooke Yield Plus focuses on an underserved segment of the UK market, by providing loans to lower- and middle-market UK companies and real estate sponsors. Importantly, the fund does not take risk on property developments in accordance with its mandate.

We find ourselves in an inflationary period where companies and real estate sponsors increasingly need access to capital to fund ballooning balance sheets. Westbrooke Yield Plus can offer bespoke lending solutions that can achieve outsized returns relative to risk, achieved through allocating capital more effectively than the traditional high street banks that seem to be in a constant state of retreat given the ailing macro backdrop. This is made possible by the skilled, UK-based investment team with deep relationships and experience in that market. The team identifies high quality, income producing assets with resilient cash flows and with capital preservation at the heart of the investment risk philosophy. This allows the fund to compete successfully for appealing debt opportunities while generating attractive, risk-adjusted returns for investors.

Here are some of the benefits of this investment:

The fund has the ability to generate a cash yield (currently c.9.3% in GBP) that is higher than yields on traditional fixed income (c.5% in GBP for a two-year fixed deposit), bond and cash investments (c.3% in GBP in the bank).
A private debt fund isn’t marked-to-market like listed equities and bonds, thereby reducing correlation to public markets as part of a broader portfolio strategy.
Returns are in hard currency and linked to interest rates, delivering currency diversification for South African investors and an effective inflation hedge, as rates tend to stay elevated for as long as inflation is high.
Tax-efficient returns are made possible by the structure of the investment.

Westbrooke has opened a private debt capital raise that will end on 14 December 2023. This will be offered to South African investors in terms of a CIPC registered prospectus. The raise will be strictly limited to £15 million.

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About Westbrooke Alternative Asset Management

Established in 2004, Westbrooke is a multi-asset, multi-strategy manager and advisor of alternative investment funds and co-investment platforms. We have a heritage as a shareholder and operator of assets and invest our own capital alongside our investors in Private Debt, Hybrid Capital, Real Estate and Private Equity in South Africa, the UK and the USA.

We provide investors with a unique gateway to private market alternative investment opportunities which are traditionally difficult to access.

Investors benefit from the depth of experience and quality of our investment teams, who apply the Westbrooke Investment & Risk Philosophy and Approach to everything they do. This, together with our highly aligned financial interests, our heritage as an owner and operator of assets, our multi-decade track record of performance and our focus on capital preservation provides our investors with a unique advantage. Invest with the Westbrooke Advantage