Market Update - December Quarter 2022

Current Economic and Market Environment

The current market environment for public and private investments is undergoing a period of change
and volatility bringing both risk and opportunity. The main drivers of markets are the policy settings
of central banks, governments, and the facilitation of loans by commercial banks, which determine
the supply of money in the economy and financial system. In Australia, and in most other countries,
we are still in a contractionary environment for policy and money supply making it no surprise that
impending global recession is the consensus view among investors.

We are now near the end of the policy cycle of central bank rate hikes and expect that over the next 1-
2 quarters markets will price in a trough in economic growth in the second half of this year. However,
we are alert to a very dynamic macroeconomic environment as we highlighted in our year end public
market outlook last December.

The dominant economic narrative we currently have is a downtrend in inflation, most evident in the
US which is expected to lead other countries like Australia in a normalization of inflation back towards
longer term targets.

For GDP, whether we get the depths of a full recession in Australia and other overseas countries, is
yet to be seen. China is on the rise, countering that trend, recovering from their long slump in activity.
The implications for public financial markets, (i.e., listed equities, traded bonds, commodities, and
currencies) was a continuing volatile sell-off in equities in the last quarter of 2022. However, the rally
in equities in the first two weeks of 2023 is challenging the argument for further declines. We are
dynamically assessing this view and believe we could be establishing a base for an equity market
recovery while still having the potential for further lows in the next few months. Please look out for
our public market update in February 2023 when we will have a clearer read on the central bank policy
direction, money liquidity and market direction.

Private Market Trends

Private markets by comparison have been relatively stable to date as they are not impacted by daily
market fluctuations. Private market valuations have had few adjustments compared with public
market valuations. There is still some valuation adjustment to play out, particularly in property and
infrastructure. As a result, our view is to avoid core strategies and allocate to value-add and opportunistic investments that both defend against rising rate impacts and seek out market dislocations.

A turn in the equity market appetite to become more consistently positive throughout this year will
see a switch to small caps, while the IPO and M&A cycle should reignite later this year or early 2024.
For the time being valuations are still attractive for new money in private equity and venture capital,
making this year an attractive year to deploy capital into these asset classes. Many institutional
investors are still cautious about allocating to less liquid private market alternatives which leads to
less competition for these deals.

Relative valuations between debt and equity are noteworthy given our top picks in private debt funds
are returning income yields of 10+% or high single digits. For example, property equity offering target
returns need to have a decent premium (e.g. 4-5% more) above property private debt yields. There
appears to be good value yields in our best pick private debt strategies, with new offerings expected
to be available over the quarter.

We still believe strongly in the role of private market alternatives, as the long-term trends remain
intact. Companies will remain private longer, with more innovation and growth taking place and
further disintermediation of bank lending. We see a longer-term trend to alternatives allocation
continuing through this weak market cycle. We view money invested in the 2022 and 2023 vintage
years as attractive and similar to past recession cycles (2000-2001 and 2008-2009) due to less
investor money available and more opportunities. If there is a more benign economic slowdown, this
window may be shortened. The main attraction longer term is that better returns can be achieved in
private markets than public markets overall, with the trade-off being lower liquidity.

Approaches to Private Markets

Investor approaches to these asset classes can start with less risky fund of funds and core strategies,
and then seek best-of-breed individual funds, core-plus and opportunistic strategies, and portfolios of
individual special situation deals. Deep research is needed to establish which are the better-quality
return offerings, as the range of outcomes across these markets is wide. Diversification is key in
managing risk and we would advocate a fund or fund of funds approach initially, complemented by
well selected concentrated strategies across the various asset classes. We support single investment
in property funds where there is a tangible asset backing the investment. For single private debt
investments, we prefer tangible property assets. We are more cautious about single loans in
companies or riskier property development assets unless we have very deep specialist analysis and risk control to support it. Similarly for single company capital raisings, we prefer these are undertaken
via co-investment funds and not taken as a single investment. This is due to the due diligence
requirements and adverse selection of offers for an individual investor. The track record of the fund
manager and individuals is a key selection criterion for our private market offerings.


Partners Private Pty Ltd ABN 72 134 627 375 is an authorised representative of Partners Wealth Group Advice Pty Ltd ABN 82 162 823 083 (AFSL No. 483842). Partners Private Pty Ltd is a wholly owned subsidiary of Partners Wealth Group Pty Ltd ABN 17 140 105 077. All information in this document is general in nature and is not intended to be advice. It does not take into account your financial circumstances, goals and objectives. Before acting, you should consider its appropriateness having regard to your own circumstances. For more information please visit