This edition of Market Factors begins with a Morgan Stanley assessment of private lending’s threat to the global financial system. We move on to a bright outlook for the pipeline and energy infrastructure sectors and cover competing efforts to put more people on the moon in the diversion section.
Market risks
Concerns grow in private lending sector
Morgan Stanley strategist Vishwanath Tirupattur believes that private credit does not represent a systemic risk to markets, which is good because I think the broader private equity sector does represent a major potential source of financial system and market upheaval, not least for major domestic pension plans that are already feeling the pain.
The collapse of the AI bubble would be painful but normal boom and bust market behaviour, whereas a comprehensive unwinding of the private credit and equity sectors would see the arise of fears last seen 18 years ago.
Mr. Tirupattur penned Morgan Stanley’s weekly Sunday Start report and called the column Risks in Private Credit – Significant but Not Systemic. This concerns a specific type of vehicle called a business development corporation (BDC) that collects investor assets and provides loans to (hopefully) growing businesses.
Mr. Tirupattur begins with the right question where financial system risks are concerned: is there too much leverage? He notes that a consistently growing ratio of total U.S. corporate debt to GDP has been a reliable signal of systemic leverage. Thankfully, the ratio of low grade lending in the economy has remained flat at non-alarming levels.
U.S. banks were forced to shore up balance sheets after the Global Financial Crisis and that left higher-risk lending to smaller companies (Blue Owl Capital is an relevant example) and non-bank financial institutions that are less able to withstand financial shocks. The asset class is illiquid, and clients clamouring for their money back would cause a very big mess of called loans and likely business bankruptcies.
Investors have been asking for their money. A report by the Financial Times indicated that wealthy investors are in the process of requesting US$10-billion in redemptions from private credit in the first quarter of 2026. Large-scale sellers of private credit exposure like Blackstone and Blackrock have so far pledged to honour US$7-billion in redemption requests.
The end of the quarter should see a huge surge in redemption requests as concerns mount. What percentage of the estimated US$1.5-trillion in private lending that will be redeemed is anyone’s guess.
The FT also highlighted significant losses for Canadian pension plans on private equity holdings. The Ontario Teacher’s Pension Plan (OTTP) and the Ontario Municipal Employees Retirement Systems suffered losses of 5.3 per cent and 2.5 per cent, respectively, on their private equity portfolios last year.
It wasn’t that long ago that holding private credit and equity was a sign of wealth and sophistication as investors could own assets unavailable to the great unwashed in plebeian stock markets. Financial firms showed their true core competency by turning the trend into a cash cow that reached a steadily wider audience. This source of revenue is now threatened.
I think Mr. Tirupattur is correct in emphasizing the major banks’ absence from this particular private lending sandbox as reason to believe that the broader financial system is not in the crosshairs this time. I do, however, expect a lot of volatility in both private equity and private credit sectors as a flood of redemptions results in the selling (or attempts at selling) illiquid assets. The vaporization of big chunks of investor assets (in some cases unjustly, to be fair) and even the failure of a small U.S. financial firm would not be a surprise.
An oil pipeline valve at the Enbridge Mackinac pump station yard in Mackinaw City, Mich., March 15, 2024.CYDNI ELLEDGE/The New York Times
Sectors
Opportunities abound for pipelines and energy infrastructure
It’s not often that an equity analyst at a bank-owned brokerage uses phrases as definitive as “there’s no slowing down in the pace of growth opportunities.” But that was the case for RBC Capital Market’s Maurice Choy in a report on pipelines and energy infrastructure.
The analyst believes higher valuation levels are justified “with growth seemingly abundant and sustainable across all companies.” Demand for energy is robust and the Iran conflict highlights North American efforts towards energy security. The motivation to improve egress for domestic oil and gas is at a high point.
Mr. Choy believes that Enbridge, TC Energy, Pembina Pipeline and Keyera are set to raise guidance after much of the sector has already. Those are his preferred plays on the theme.
An Astrobotics commercial landerSupplied/AFP/Getty Images/ASTROBOTICS
Diversions
The new space race
Reports from Futurism and Space.com suggest that China’s program to land humans on the moon is ahead of NASA’s. This is an absurdly timely echo of the Soviet Union’s Sputnik spacecraft that gave the entire United States an existential crisis by orbiting the earth first.
The symbolic stakes are arguably just as high now as 70 years ago. At that point, the Americans were fighting the spread of communism with everything they had. The Sputnik win made Soviet science, and thus living under Soviet control, look more advanced. Apollo 11 was necessary to reassert democracy as the preferred orientation.
Moving to current day, America is showing all the signs of entropy and permanent decay. No major institutions are still widely trusted, corruption is expected in all walks of life (Congress trading stocks is a good example) and the president can barely put a coherent sentence together, just to name three signs.
The 1960s and early 1970s were also a time of upheaval and instability. Horrifying assassinations (JFK, RFK, and MLK), domestic terrorism, rioting, protests, a surging violent crime rate (people often forget that the Kurt Russell classic Escape from New York wasn’t that far from the truth), Vietnam, the Munich Olympics and Watergate all gave a sense that everything was falling apart. The moon landings were effective at offsetting the nihilism.
It’s hard to have a ton of faith in the Americans at this point. I’m hoping, however, to be pleasantly surprised. NASA just pushed their expected moon expedition from 2027 to 2028 while China’s target date is only defined as before the end of the decade. The race is on.
The essentials
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Globe Investor highlights
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Tim Shufelt on how the stock market hasn’t changed all that much despite a very different geopolitical world
David Berman on how Donald Trump has sparked a surprise rally in renewables stocks
Our new Globe Investor reporter Andrew Galbraith on why investors should avoid looking for a market bottom in wartime
Tom Bradley on why Canadian bank valuations are so low
Quick hits
There’s not a lot to talk about regarding markets right now. If the Iran conflict ends soon, stocks rally. If the conflict goes on or expands, stocks will go down while defensive sectors like consumer staples and telecom services outperform. That’s basically it. William Wilby, a former star fund manager at Oppenheimer and a West Point graduate who worked for Army Intelligence during the Vietnam war, told a meeting I was in that institutional managers are forced to freeze during major conflicts. There’s no way to accurately estimate earnings and cash flow when World War three is a possibility.
RBC Capital Markets quantitative analyst David Cheng likes covered call writing ETFs in the current environment and I don’t hate it as an idea. It is a risk-conscious way to benefit from derivative prices pushed higher by market volatility.
Google tells me that energy giants Canadian Natural Resources and Suncor Energy are the most popular investment-related searches for the past 30 days. The banks are next (Royal Bank and TD Bank most often), followed by Shopify and energy infrastructure and utilities stocks. The next time I ask for the most popular search terms I expect infrastructure and utilities to be at the top of the list.
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