The Roundup: Top Takeaways from Oaktree’s Quarterly Letters – December 2024 Edition

Summary

• U.S. GDP increased at a robust annual rate of 2.8% in the third quarter, consumer sentiment hit a seven-month high in early November, and more than 225,000 jobs were added in November.
• Expectations for federal funds rate cuts have moderated due to the robust U.S. economy and the prospect of inflationary policies from the incoming Republican administration, including steep tariffs, tax reductions, and immigration restrictions.
• High-income assets, particularly floating-rate instruments like senior loans and CLOs, have profited from elevated Treasury yields and tight credit spreads.
• The U.S. population above age 65 is projected to increase by nearly 25 million between 2022 and 2050, with the cohort above 85 years of age expected to triple by 2050.
• Per-person healthcare spend for Americans aged 65 and above with two or more chronic conditions is roughly 2.5 times that of working-age people.
• Global annual R&D spending on drugs is expected to reach $290 billion by 2026.
• Life sciences companies are increasingly pursuing non-dilutive debt financing from specialist direct lenders rather than equity markets.
• Core and core-plus real estate valuations have shown signs of stabilization after a reset driven by higher interest rates, supported by improving fundamentals, declining interest rates, increased debt liquidity, rebounding REIT prices, and rising buyer demand.
• The office sector continues to face significant headwinds and value declines, while the multifamily sector benefits from a 48% expected decline in new supply from 2024 to 2025.
• Monthly ownership costs for housing exceed equivalent rental costs by a historically high margin due to limited for-sale housing availability and increased replacement costs.
• 467,000 net-new multifamily units were leased in 2024, the highest annual amount since 2000 excluding 2021 and 2022.
• Private CMBS debt issuance is up by 154% year-over-year following a shift in interest rate policy.
• China's economy recorded its lowest year-over-year expansion in 18 months at 4.6% in the third quarter of 2024, with consumer confidence near record lows and property transactions falling sharply.
• China announced a broad stimulus package in late September including monetary easing, financial aid to students and the elderly, and measures to bolster housing demand through lower mortgage rates and tax subsidies.
• Global convertible bond issuance in 2024 is running at the fastest pace since 2021, with over $60 billion in primary issuance in the U.S. and over $32 billion outside the U.S.
• The average coupon for a new global convertible bond is 3.4%, compared to a low of 1.0% in 2021.
• The majority of convertible bond issuance in 2024 has occurred in the technology sector, including Chinese technology companies seeking dollars for international expansion.
• The MSCI EAFE Index currently has a price-to-earnings ratio around half that of the S&P 500.