Debt could be more reliable than equities in 2025

As equity investors have experienced, February and March have been tough months and seeking solid returns from equity markets in 2025 could be a challenge.

The Australian share market has dropped around 3.9% over the year to 21 March. In the US, equity markets have dropped by more, led by technology shares, with the Nasdaq Composite Index down around 8.4% over the year to date, and the S&P 500 down 3.7%. Heightened uncertainty about US trade tariffs introduced by the Trump administration and the threat of a global trade war has pushed some investors to sell equities.

Could investors be better off looking at private debt for their returns? That’s the view not only of investors who are selling shares and moving to cash, but of famed investor Howard Marks, who recently said credit returns, whether from corporate bonds or private credit, would likely exceed returns on US equities in 2025 and beyond.

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“From the S&P, you’re not going to get the historic return of 10% a year for the next decade. You will get something less and if that’s true, then the returns described from credit are quite competitive and dependable,” Marks, co-founder and co-chairman of Oaktree Capital Management, told the Economic Times in early March.

“Credit investments have historically had low yields. Now the tables have turned. High-yield bonds are at 7% … private credit at 9% to 11%. These are very good absolute returns and competitive with equities earned contractually and independently.”

In his recent blog post, Gimme Credit, Marks said credit returns are less subject to variability and uncertainty compared to equities. With the yield on 10-year US Treasury bonds higher than the earnings yield on the S&P 500 stock index, credit looks good, according to Marks. While this doesn’t prove that bonds are going to beat stocks in the years ahead, it is one more argument that credit will likely do better, Marks writes.

A history of solid returns

Research from the IMF suggests that private credit is far less volatile than listed equities. And this year is not a good one for equities.

Right now, private credit could provide much calmer waters for investors than share markets. According to the IMF, private credit has grown rapidly since the global financial crisis (GFC), taking market share from bank lending and bond markets following the long period of low interest rates.

“In this context, private credit has appeared attractive, with some of the highest historical returns across debt markets and appears to be relatively low volatility,” the IMF said in a 2024 report in its Global Financial Stability Report. The IMF also noted that the sharp growth of private credit asset allocations, with the asset class having delivered “high returns with what appears to be relatively low volatility.”

Low on systemic risk

Notably, Howard Marks says the private credit market does not carry with it systemic risk.

“My belief is that the risk in private credit isn’t systemic, since (a) private loan portfolios and their owners aren’t levered nearly as much as banks were in 2007-08 and (b) there isn’t the same level of interconnectedness, or ‘counterparty risk’, since the holders haven’t sold each other default protection and other forms of hedging, like banks did before the GFC. There are those who believe some holders of private credit have multiple layers of leverage, which could increase the risk in a downside scenario, but I have no way of knowing. The bottom line for me is that the return premium on private credit relative to public credit seems roughly fair given the merits.”

Marks’ views are backed by central banks, including comments from the US Federal Reserve and the Reserve Bank of Australia (RBA).

Both the US Fed and RBA have given the private credit sector cautious stamps of approval. The RBA stated late last year: “Default rates in private credit have been relatively low and less frequent in recent times relative to comparatively risky investments, such as in the syndicated loan or high-yield bond markets (Cai and Haque 2024). The sector has greater capacity than other forms of lending to postpone losses and defaults due to the bilateral nature of lending agreements. This has made it more resilient thus far in the cycle,” the RBA said in October.

In similar narrative, the US Federal Reserve has indicated that “financial stability risks from private credit funds appear limited” and that direct lending default rates have generally been low, compared to the broadly syndicated loan market or high yield bond market.

For investors seeking shelter from volatile share markets, private credit offers a good opportunity to reap relatively high yields with periodic monthly oncome, offering appealing fixed income diversification opportunities beyond traditional investments like bonds.

Private lending is not a foreign or new concept. In fact, it is the earlier form of financial intermediation where someone that has money lends it to someone that needs it. Over time this process has become more sophisticated.

For this reason, investors need to conduct due diligence and scope a specialist investment manager that can deliver attractive risk-adjusted returns from private credit, over time.