TRTPM monthly blog – Edition March 2025

Uncertainty over tariffs and US policy

US consumer prices rose by a less-than-expected 0.2% MoM in February, while annual inflation fell back to 2.8%. However, this is unlikely to change the Fed’s position on rate cuts of requiring more clarity on tariffs and fiscal policy. Analysis by Oxford Economics using the Global Trade Analysis Project (GTAP) model suggests that 25% US tariffs on the EU, with retaliation, would cut bilateral trade by around half and that total imports in both economies would shrink by around 7%. Heightened US policy uncertainty and adjustments in tariffs caused the OECD to cut its global GDP growth forecast for 2025 to 3.1% from 3.3%, and lower its projections for many countries. Despite this, the US is still expected to outperform most other advanced economies.

Uncertainty over tariffs and a lack of clarity on motives is reducing business risk appetite in the US, Europe and China as firms find it harder to plan ahead, which will likely harm global growth. The threat to the US economy and worsening sentiment saw US stock prices fall, with the S&P 500 down 10% and the technology-focused Nasdaq down nearly 14%, its worst performance in over two years. The listed real estate market also saw declines, with prices according to the FTSE EPRA Nareit Developed Index dropping nearly 5% in the first two weeks of March, indicating a pullback in investor sentiment on listed real estate.

Sentiment towards unlisted real estate also eased, with the INREV Consensus Indicator recording its first decline in March since September 2023, with a headline reading of 56.7 and all five sub-indicators falling. Although the indicator overall was above 50 and in positive territory, the economic and new development sub-indicators were below 50, indicating contraction. Real estate market performance will be impacted by how trade policy evolves and its impact on the economy and occupier demand. Persisting geopolitical tensions and a potential global trade war would likely weigh on real estate returns.

Fear and trembling in the face of tariffs

The word ‘recession’ is once again top of mind for investors around the world. President Trump’s announcements of tariffs against China, Europe, Mexico and Canada have escalated geopolitical tensions, with the global equities indices down as much as 8% within a week. Furthermore, President Trump failed to rule out a recession in a recent interview on Fox Business, arguing that we should not watch the stock markets, while doubling down on his use of tariffs. Understandably, some investors have asked whether this changes our positive view of infrastructure, as our latest infrastructure outlook is the most bullish one we’ve written in the last three years.

We argued that the stars are aligned for infrastructure, as GDP growth, inflation, interest rates, valuations, competition, and other market factors are all supportive. However, with the threat of tariffs, inflation could rise while GDP growth could slow down. Since infrastructure has strong pricing power and can pass on higher costs to customers, we’re less concerned about the inflationary impact. If anything, infrastructure tends to perform well during inflationary environments. On the other hand, the slowdown in GDP growth is an incremental negative, but infrastructure assets are typically more defensive and less exposed to economic cycles. Therefore, the first order effects of tariffs on infrastructure are relatively neutral.

How about the second order effects? Higher inflation could slow down rate cuts, but slower GDP growth could also motivate central banks to cut faster – so at first glance, the direction of travel for rates is less clear. On this issue, President Trump actually explicitly stated during the same interview that he wanted interest rates to decrease. If this is the administration’s overarching policy goal, it would actually be positive for infrastructure, as high rates were the number one concern for infrastructure investors in the last few years. Recent dovish comments from the Fed also provide further comfort.

Tariffs could also accelerate the ongoing onshoring and reindustrialization efforts, positive for infrastructure that is benefitting from deglobalization. Finally, market uncertainty could actually drive investors into ‘safe haven’ asset classes like infrastructure.

In the face of almost absurd daily policy swings, we believe infrastructure investors should keep their faith in the asset class, given its long track record of stable performance during uncertain times.

Sentiment shifts amidst tariff and policy changes

Compared to last month, private company investor sentiment has tempered somewhat as investors assess potential tariff and policy implications on company performance and on their portfolios. This caution was reinforced as the US central bank indicated that the pace of interest rate reductions may slow in response to market conditions. In public markets, investors seemed to be questioning the story of US exceptionalism that has been the theme of the past several years, underpinned by the strong US consumer. As US consumer sentiment has fallen significantly in the past month, time will tell whether the public market’s view reverts or begins to pervade private markets.

Today’s best-positioned managers have a) a strong fundamental value creation strategy, rooted in increasing top- and bottom-line company performance; b) discipline in entry multiple and investment pacing; and c) a good up-market reputation boosting exit demand.

The fundraising environment remains challenging. Managers with excellent track records are raising significantly larger funds, while average (sometimes even modestly above average) track records fail to capture investor interest. Large managers continue to have the most fundraising momentum. Secondaries markets are active, with the usual caveat of increased buyer caution which typically accompanies downward public markets moves, since these companies and portfolios are often priced off of previous (higher) valuations.

Role of asset-backed finance in portfolios

As we move through 2025, the private credit market continues to evolve. While private credit is often associated with corporate direct lending, the market extends far beyond just the corporate segment of the market. It also includes asset backed finance (ABF) private credit strategies, which include privately originated loans secured by financial assets or real estate as collateral. The ABF universe is large and includes a wide range of asset classes, including residential real estate credit, commercial real estate credit, specialty finance, and structured credit.

These strategies can often be less competitive compared to corporate direct lending strategies and also offer several advantages, including higher interest rates and better structure for lenders due to the ability to negotiate more favorable loan terms. One of our key advantages as a multi-manager is our ability to partner with a diverse number of credit platforms and allocate capital to those sectors that provide the best risk/return profile at a given point in time. In recent years, we’ve seen and capitalized on various shorter duration private credit opportunities, ranging from homebuilder finance strategies within residential real estate credit to small business lending within specialty finance to bridge-to-agency multifamily CRE loans within commercial real estate credit. Many ABF market segments require a high degree of specialization to originate and underwrite loans and this required specialization can often lead to higher barriers to entry compared to other segments of private credit.

Furthermore, the traditional banking sector has also been less active in these market segments in recent years, which has contributed to the reduction in competition and increased opportunities for ABF lenders to take market share and originate more loans.

Given the current market conditions, incorporating asset-backed short duration strategies can be beneficial and complimentary to existing private credit portfolios. These strategies have consistently demonstrated strong performance even in more challenging markets and may offer added downside protection through collateral and strong covenants.