Billionaire Howard Marks Prefers Credit Over Equity Amid Falling Market: 'Yields Implies Higher Returns From Credit Than The S&P 500'

Billionaire investor Howard Marks has highlighted the shifting investor sentiment toward credit investments amid the ongoing downfall in the equity markets. In his latest memo, he underscores how private debt offers higher returns than the S&P 500 index amid elevated valuations.

What Happened: In his latest memo ‘Gimme Credit,’ dated March 6, Marks explains how credit investments, especially private credit, is an attractive asset class with higher return potential, but he cautions investors to be aware of its unique risks, particularly the lack of transparency and the uncertainty surrounding its performance in a future crisis.

Despite the current narrow spreads of around 290 basis points, the co-founder and co-chairman of Oaktree Capital Management argues that credit investments offer healthy absolute returns and are fairly priced in relative terms.

“The current level of offered yields implies higher returns from credit than the S&P 500, with returns that are contractual and thus subject to much less variability and uncertainty,” the memo states.

Comparing his latest analysis to his Jan. 7 memo, ‘On Bubble Watch,’ he describes that at current valuations the S&P 500 index is likely to produce ten-year returns averaging between -2% and 2% per year. However, this is not the case with today's expected returns on credit.

“We'd rather buy at higher yields and wider spreads, and we may get a chance to do so . . . or not. But that preference in itself isn't a reason for not increasing allocations to credit today,” he writes.

Why It Matters: Contrasting the difference between buying the S&P 500 at current valuations versus buying private credit at lower spreads, the dot-com crash predictor explains that high-yield bond investors earned more than Treasuries in 10 years.

According to him, the reason for this is that “The issuer pays interest and principal as promised, the price decline brought on by spread widening has only a temporary effect. When you're repaid at par, you'll have received the yield you expected, regardless of price fluctuations experienced in the meantime, including declines related to spread widening.”

Also, investing at lower yields is not a major issue as per Marks because of the following reasons;

Historical spreads cover default losses.
Improved economic management has reduced default risk.
Total return, not just spread, is the key metric.
Consistent interest payments and principal repayment prevail.
Contractual bond returns provide stability.
Active management further reduces default risk.

However, some cons of investing in private credit include;

Illiquidity: Funds locked, no quick exits.
Unproven In Crisis: Untested during severe downturns.
Potential For Lax Standards: Risk of rushed, poor-quality loans.
Marking To Model Risk: Valuation subjectivity, potential for overvaluation.
Lack Of Transparency: Limited public information and regulation.
Higher Fees: Increased costs compared to public credit.

Price Action: The SPDR S&P 500 ETF Trust SPY and Invesco QQQ Trust ETF QQQ, which track the S&P 500 index and Nasdaq 100 index, respectively, fell on Tuesday. The SPY was down 0.83% to $555.92, and the QQQ also declined 0.24% to $471.60, according to Benzinga Pro data.

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