Financial markets are at an interesting juncture: public equities rebounded in 2023 (although most gains were from the Magnificent Seven¹  technology stocks), conflict persists in Ukraine, and a new conflict has flared in the Middle East. At the same time, some businesses are struggling while banks continue tightening lending standards. Still, most investors are upbeat about prospects for 2024, believing policymakers have contained inflation and that the U.S. economy can sidestep recession. 
This issue offers insights from investment professionals throughout Brookfield and Oaktree on: 

• Real estate: As 2024 gets underway, we are optimistic about real estate, where favorable supply-demand fundamentals should benefit the sector as central banks are expected to shift to cutting rates. 
• Infrastructure: Investment opportunities remain robust as infrastructure continues to benefit from what many observers have called a super-cycle. This is creating favorable conditions for value investors as many businesses, particularly those with large growth pipelines, are available at more attractive entry points.
• Credit: Leveraged loans are coming off a historic year and, we believe, should continue to benefit from attractive yields as base rates remain above their 10-year average. 

Our Alts Market Dashboard shares some data, market and investing insights that we find interesting from across the alternative investing universe. Notable numbers include: 

• Despite a significant slowdown in mergers and acquisitions, private lenders continue capturing market share from traditional banks, helped by the resilient nature of the asset class. That strength is reflected in yields for direct lending of 11.76%, up 75 basis points from one year ago.²
• Real estate markets are showing signs of recovery with net income growth (at 4.7%) continuing to exceed historical averages.³

Finally, we offer some definitions that investors who might be relatively new to alternative investing may find useful, including an explanation of what is driving increased demand for industrial/logistics real estate. Investors who want to explore any of the investment themes in this publication in more detail should consult with their financial advisor.

Real Estate: Reasons for Optimism Ahead 

We believe the real estate market is poised for a strong recovery as headwinds created by inflation and the recent rapid rise in interest rates gradually recede. Strong underlying fundamentals and healthy supply/demand drivers, coupled with lower valuations for high-quality properties should drive opportunities for outperformance in certain real estate subsectors. 
We are closely monitoring three themes⁴: 

• Demographics and affordability: U.S. housing is in high demand, with household formations steadily increasing even as the cost of home ownership is at historically high levels and mortgage rates are significantly above recent historic lows. In addition, new homes are heavily undersupplied due to lagging new construction starts. The combination of these factors is driving many potential buyers to stay in rental housing for longer. Indeed, multifamily supply has failed to meet demand for the past decade and new starts are down 70% from their peak (Figure 1). These dynamics are creating attractive opportunities to meet rising demand by building new supply, renovating existing assets and optimizing operations.
• Changing consumer preferences: As post-pandemic consumers adapt to changing work lifestyles and place more importance on leisure time and high-quality experiences, the hospitality and entertainment sectors are enjoying a strong recovery. We see opportunities to target undermanaged and undercapitalized assets as well as platforms with exposure to markets where demand is increasing. The pandemic also accelerated e-commerce and online shopping, increasing the need for more logistics warehouse space, where vacancies have been at record lows, creating an opportunity to drive rents as tenant demand increases. 
• Deglobalization: Evolving global trade trends have spurred sharp growth in logistics and advanced manufacturing factories as firms focus on securing supply chains, adding inventory, and onshoring. Deglobalization has also become necessary for national security reasons, particularly in critical industries, such as semiconductors and pharmaceuticals, that are also being supported by industrial policies. This increased demand has created opportunities for real estate development of purpose-built space. 

We are at a rare inflection point in the real estate market cycle. Capital markets have been challenged by the high cost of capital, and low transaction volumes creating downward pressure on valuations. At the same time, underlying real estate fundamentals are strong, bolstered by strong demand and limited supply across several sectors. We believe these dynamics can create a meaningful opportunity to deploy capital over the next few years, investing in high-quality real estate on a value basis.

Infrastructure: Acquiring Growth Assets for Value 

The infrastructure sector faces very different circumstances than at any time in recent years: interest rates are high, inflation has been elevated in many markets, and economic growth is expected to slow. As a result, access to capital is no longer easy and many investors are on the sidelines, potentially creating a buyer’s market (Figure 2) for attractive infrastructure assets. 

Infrastructure opportunities are typically classified into two main categories: brownfield and greenfield. (At Brookfield, “greenfield” investments are also called “platform” investments because they offer the potential to grow a platform.) A significant portion of the opportunity set is concentrated in brownfield investments—existing, operational assets that seek to offer high current income with modest growth potential, such as a utility.

We see potential in both types of investment, but given today’s environment, we are finding significant opportunities in platform assets. These assets are less-established operationally and tend to provide lower current income but with potentially significant growth. Given the lack of available buyers, these businesses are available at attractive entry points.  

Many of these platform investments are driven by digitalization and decarbonization, megatrends focused on the build-out of digital infrastructure and the net-zero transition. Everything from artificial intelligence to streaming has made data increasingly important, driving demand for data centers, cell towers and fiber networks. Decarbonization opportunities are wide-ranging, including some often-overlooked opportunities focused on enhancing energy efficiency. For example, smart metering services for utilities that provide more accurate energy readings.

These investments share similar characteristics: strong demand for the services they provide, the ability to attract a strong customer base, and the ability to scale operations to meet incremental needs. As a result, we believe many of these projects have low execution risk. Large projects can be contracted out before construction, and contracts are often tied to inflation. This helps to provide stable cash flows, mitigating downside risk. In 2024, we are focused on building out these platforms. We are also open to engaging in similar opportunities, at the right price, in what could prove to be a strong year for infrastructure investing.

Credit: After Stellar 2023, Solid Outlook for Senior Loans

U.S. senior loan prices rose in the fourth quarter, supported by limited new loan issuance, moderating recession fears and expectations of lower interest rates ahead. Indeed, 2023 was an exceptionally strong year with U.S. senior loans gaining 13.32%, their best annual return in more than a decade (Figure 3). 

Notwithstanding fading recession fears, many strategists continue forecasting higher defaults in the coming months among U.S. and European leveraged loans, driven by higher borrowing costs. Still, we expect defaults should remain manageable (Figure 4) even if the U.S. and European economies contract. Our view is supported by the limited number of maturities coming due and the strength of issuers’ balance sheets (especially in Europe).

Despite concerns that overall quality of the market has declined, loans remain supported by attractive yields and rates above their 10-year average, which should continue to make floating-rate assets compelling. As of year-end, the implied federal funds rate was 3.8%, down from 4.6% in the U.S. Federal Reserve’s November projections. Even at a reference rate of 3.8%, the implied yield of leveraged loans should remain attractive, suggesting investors who stay invested will continue benefiting from high coupons for the foreseeable future.
In addition, since collateralized loan obligations (CLOs) are the main holders of leveraged loans and are considered stable buyers of the asset class, there should also be limited selling pressure, making leveraged loans potentially less volatile than many other asset classes.
 
Despite the broad consensus that the U.S. might achieve a soft landing, we are only cautiously optimistic about this outcome. Against this backdrop, we believe credit selection will be as crucial as ever to successfully navigate the current market. 

ENDNOTES
1  The Magnificent Seven refers to Apple, Amazon, Alphabet, NVIDIA, Meta, Microsoft and Tesla.
2 Source: Cliffwater Report on U.S. Direct Lending, reflecting CDLI 3-year takeout yield.
3 Source: NCREIF. Reflects the net operating income (NOI) growth for properties included in the NCREIF Fund Index – Open End Diversified Core.
4  Brookfield, Three Themes Creating Opportunities in Global Real Estate, May 10, 2023.
5  Source: Cliffwater Report on U.S. Direct Lending, reflecting CDLI 3-year takeout yield.
6  Source: Bloomberg. Reflects ICE BofA US High Yield Index yield to worst. Yield to worst is a measure of the lowest possible yield that can be received on a bond that fully operates within the terms of its contract without defaulting.
7  Source: Bloomberg. Reflects FTSE Global Core Infrastructure 50/50 Index dividend yield.
8  Source: FactSet. Reflects FTSE Global Core Infrastructure 50/50 Index average EV/EBITDA multiple, a ratio used to determine the value of a company, which is enterprise value (EV) divided by earnings before interest, taxes, depreciation and amortization (EBITDA).
9  Source: Preqin.
10  Source: Pitchbook Q3 US PE Breakdown, reflecting the size of a loan used to finance an asset relative to the value of that asset.
11  Source: Greenstreet. Reflects the simple average of cap rates for U.S. property types.
12  Source: NCREIF. Reflects the net operating income (NOI) growth for properties included in the NCREIF Fund Index – Open End Diversified Core.

A WORD ABOUT RISK
Investments in real estate-related instruments may be affected by economic, legal or environmental factors that affect property values, rents or occupancies of real estate. Infrastructure companies may be subject to a variety of factors that may adversely affect their business, including high interest costs, high leverage, regulation costs, economic slowdown, surplus capacity, increased competition, lack of fuel availability and energy conservation policies. Alternative investments often are speculative and include a high degree of risk. Investors could lose all or a substantial amount of their investment. High-yield bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally, the longer a bond’s maturity, the more sensitive it is to this risk. Yields are subject to change with economic conditions. Yield is only one factor that should be considered when making an investment decision. The information in this publication is not and is not intended as investment advice, an indication of trading intent or holdings, or prediction of investment performance. Views and information expressed herein are subject to change at any time. Brookfield disclaims any responsibility to update such views and/or information. This information is deemed to be from reliable sources; however, Brookfield does not warrant its completeness or accuracy. Opinions expressed herein are current opinions of Brookfield, including its subsidiaries and affiliates, and are subject to change without notice. Brookfield, including its subsidiaries and affiliates, assumes no responsibility to update such information or to notify clients of any changes. Any outlooks, forecasts or portfolio weightings presented herein are as of the date appearing on this material only and are also subject to change without notice. Past performance is not indicative of future performance, and the value of investments and the income derived from those investments can fluctuate.
FORWARD-LOOKING STATEMENTS
Information herein contains, includes or is based on forward-looking statements within the meaning of the federal securities laws, specifically Section 21E of the Securities Exchange Act of 1934, as amended, and Canadian securities laws. Forward-looking statements include all statements, other than statements of historical fact, that address future activities, events or developments, including, without limitation, business or investment strategy  or measures to implement strategy, competitive strengths, goals, expansion and growth of our business, plans, prospects and references to our future success. You can identify these statements by the fact that they do not relate strictly to historical or current facts. 

Words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and other similar words are intended to identify these forward-looking statements. Forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Many such factors will be important in determining our actual future results or outcomes. Consequently, no forward-looking statement 
can be guaranteed. Our actual results or outcomes may vary materially. Given these uncertainties, you should not place undue reliance on these forward-looking statements. It is not intended to provide an overview of the terms applicable to any products sponsored by Brookfield Corporation and its affiliates (together, “Brookfield”). Information and views are subject to change without notice. Some of the information provided herein has been prepared based on Brookfield’s internal research, and certain information is based on various assumptions made by Brookfield, any of which may prove to be incorrect. Brookfield may not have verified (and disclaims any obligation to verify) the accuracy or completeness of any information included herein, including information that has been provided by third parties, and you cannot rely on Brookfield as having verified
any of the information. The information provided herein reflects Brookfield’s perspectives and beliefs as of the date of this commentary.

INDEX PROVIDER DISCLAIMER
The quoted indexes within this publication are unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment. There may be material factors relevant to any such comparison, such as differences in volatility and regulatory and legal restrictions between the indexes shown and any investment in a Brookfield strategy, composite or fund. Brookfield obtained all index data from third-party index sponsors and believes the data to be accurate; however, Brookfield makes no representation regarding its accuracy. Indexes are unmanaged and cannot be purchased directly by investors. 

Brookfield does not own or participate in the construction or day-today management of the indexes referenced in this document. The index information provided is for your information only and does not imply or predict that a Brookfield product will achieve similar results. This information is subject to change without notice. The indexes referenced in this document do not reflect any fees, expenses, sales charges or taxes. It is not possible to invest directly in an index. The index sponsors permit use of their indexes and related data on an “as is” basis, make no warranties regarding same, do not guarantee the suitability, quality, accuracy, timeliness and/or completeness of their index or any data included in, related to or derived therefrom, and assume no liability in connection with the use of the foregoing. The index sponsors have no liability for any direct, indirect, special, incidental, punitive, consequential or other damages (including loss of profits). The index sponsors do not sponsor, endorse or recommend Brookfield or any of its products or services. Unless otherwise noted, all indexes are total-return indexes. 

INDEX DEFINITIONS
The Preqin Infrastructure Index captures in an index the return earned by investors on average in their private infrastructure portfolios, based on the actual amount of money invested in private capital partnerships. Each data point is individually calculated from the pool of closed-end funds for which comprehensive performance data is held, as of both the start and end of the quarter.
The Preqin Real Estate Index captures in an index the return earned by investors on average in their private real estate portfolios, based on the actual amount of money invested in private capital partnerships. Each data point is individually calculated from  the pool of closed-end funds for which comprehensive performance data is held, as of both the start and end of the quarter.
The Preqin Private Equity Index captures in an index the return earned by investors on average in their private equity portfolios, based on the actual amount of money invested in private capital partnerships. Each data point is individually calculated from the pool of closed-end funds for which comprehensive performance data is held, as of both the start and end of the quarter. 
The Cliffwater Direct Lending Index (CDLI) seeks to measure the unlevered, gross of fee performance of U.S. middle market corporate loans, as represented by the asset-weighted performance of the underlying assets of Business Development Companies (BDCs), including both exchange-traded and unlisted BDCs, subject to certain eligibility requirements.

The FTSE EPRA Nareit Developed Real Estate Index is an unmanaged market-capitalization-weighted total-return index that consists of publicly traded equity REITs and listed property companies from developed markets.
The FTSE Global Core Infrastructure 50/50 Index gives participants an industry-defined interpretation of infrastructure and adjusts the exposure to certain infrastructure subsectors. The constituent weights are adjusted as part of the semi-annual review according to three broad industry sectors: 50% Utilities; 30% Transportation, including capping of 7.5% for railroads/railways; and a 20% mix of other sectors including pipelines, satellites and telecommunication towers. Company weights within each group are adjusted in proportion to their investable market capitalization. 
The ICE BofA US High Yield Index tracks the performance of U.S.-dollar-denominated below-investment-grade corporate debt publicly issued in the U.S. domestic market. 
The ICE BofA Merrill Lynch Global High Yield European Issuers Non-Financial 3% Constrained Ex Russia Index is a sub-index that contains all securities in the broader index except those from financial issuers or with Russia as their country of risk but caps issuer exposure at 3%. The index is rebalanced monthly. The index is USD hedged.
The MSCI World Index is a free-float-adjusted market-capitalization-weighted index that is designed to measure the equity market performance of developed markets.