Looking ahead to 2025 we reflect on a year of challenges, opportunities, and resilience. The markets, as always, have provided us with a mixture of volatility and growth as the advent of AI, geo-political fragmentation, and an American "Vibe-cession" synchronized to slowing and stagnating growth in Europe and Asia. Many strategists over the course of the year, and rightly so, touted the transformational nature of generative AI, and the CAPEX boom in semiconductors and infrastructure build outs from data center, cloud and software, that propelled the average company in the Nasdaq 100 to a record P/E multiple of 38.5 (WSJ). This led to back-to-back double digit market returns for the index, where up to the time of writing has returned 26.53% (12/22/24, MarketWatch) and 49.32% in 2023 (MarketWatch). And while many fundamentalist money managers either had to hold their nose and keep allocating to keep up with the benchmark or throw in the towel all together in the face of accelerating earnings revisions, we see a healthy backdrop for the market leading sector and the broader market on the whole moving into 2025.

Underpinned by solid fundamentals in the broader macro economy, low unemployment, strong productivity gains, lowering interest rates and an American consumer that continues to defy expectations of slowing consumption, we believe the most recent changes in the political environment also provide another pillar for American exceptionalism in our economy and capital markets to continue. Moving into this new phase of innovation and growth though will likely bring about some fits and starts, and highlight the old wall street maxim that markets don't move in straight lines, which is why it is important to remain focused on the pockets of risk that exist and where they may emerge.

What we like:

Inflationary pressure starting to budge, and the real effective rate finding equilibrium.

Starting in 2024, the Federal Reserve's policy stance was quite restrictive, and had to be in order tame spiraling inflation, which was broad and ran every category in the CPI from 2021 (6.5%, BLS) peaking in June 2022 at a rate of 9.1%, and then averaging 4.1% in 2023. The Fed maintained its overnight benchmark rate of 5.5% until September 2024 acting forcefully with an opening gambit 50bps cut, which the Federal Reserve followed up with two more 25bps cuts in November and December 2024 respectively.

The 100-bps cut in the overnight rate, from 5.5% to 4.5%, tilted the scale in favor of consumers while still keeping the pressure on inflation dynamics, which have come broadly in line with expectations, with the latest data for November CPI reading 2.7% annualized. We believe this has set the stage for a soft-landing or no-landing scenario in the US economy and should still leave enough room for healthy and robust GDP growth, PCE consumption, employment and corporate profits without upending trends in the credit or fixed income markets.

Growing US Economy and Upside Surprise.

Supported by lower interest rates, bolstered consumer spending and inflationary trends we believe that US GDP growth could surprise to the upside in 2025, as corporates take advantage of cheaper refinancing costs, friendlier political regime and inflationary pressures easing potential margin compression and corporate profits. The US conference board forecasts US GDP

growth close to 2% in 2025, while Goldman Sachs recently increased their forecast to 2.5%, while this is a moderation on 2024 numbers, it's much closer to the FY2024 2.7% GDP growth that was experienced, than the deceleration many strategists and economists anticipated.

Opportunities in Closed-End Funds

Our investment focus lies primarily in Closed-End Funds (CEFs), which we believe offer compelling opportunities in the current market environment. As we look ahead to 2025, CEFs remain well-positioned to provide investors with both income and growth potential, especially in sectors that are poised to thrive. Here are some areas where we see significant opportunities:

• Income Generation: With interest rates stabilizing, fixed-income-focused CEFs are offering attractive yields. High-quality municipal bonds, investment-grade corporate debt, and hybrid strategies are likely to deliver consistent income while reducing volatility.
  
  

• Discount Opportunities: Many CEFs are trading at historically wide discounts to their net asset values (NAVs), presenting attractive entry points for investors. We will actively seek funds where market dislocations provide opportunities for long-term value.
  
  

• Sector-Specific Strategies: Equity-focused CEFs in technology, healthcare, and sustainable energy offer growth potential while delivering regular distributions. We are particularly focused on funds that provide diversified exposure to high-growth industries.
  
  

• Leveraged Funds: In a stabilizing interest rate environment, leveraged CEFs can enhance returns by capitalizing on relatively low borrowing costs. While leverage introduces additional risks, we remain disciplined in identifying funds that manage risk effectively.

Expanding into Private Credit.

In addition to our focus on Closed-End Funds, we are excited to announce our expansion into private credit as part of our investment strategy for 2025. Private credit, which involves lending to small to middle-market companies outside of traditional banking channels, has emerged as a compelling opportunity for investors seeking attractive risk-adjusted returns. We see private credit specifically provide investor value due to its:

• Income Potential: Private credit investments typically offer higher yields compared to public fixed-income markets, making them an appealing option for income-focused investors.
  
  

• Diversification Benefits: Private credit provides a differentiated source of returns that can enhance portfolio diversification, particularly in uncertain market environments.
  
  

• Middle-Market Opportunities: Middle-market companies, often underserved by traditional lenders, present opportunities for direct lending that can deliver stable cash flows and favorable terms.
  
  

• Resilience in Volatile Markets: Private credit investments are often structured with strong covenants and protections, helping to mitigate risks and preserve capital during economic slowdowns.

Fixed Income and Closed-End Bonds

After a challenging period for fixed income investors, the bond market is poised to deliver improved performance in 2025. Closed-end bond funds, with their ability to provide diversified exposure to high-quality bonds, are an attractive option for generating income and mitigating risk. We see significant value in municipal bond funds, high-yield funds, and senior loan strategies that balance income and capital preservation.

Risks on the Horizon:

While we are optimistic, we must remain aware of risks that could influence the market outlook:

• Geopolitical Tensions: Ongoing conflicts, trade disputes, and elections in major economies may impact investor sentiment.
  
  

• Monetary Policy: Central banks’ ability to balance inflation control with economic growth will be critical.
  
  

• Market Liquidity: Closed-End Funds, while offering attractive opportunities, can experience heightened volatility during periods of market stress.
  
  

• Private Credit Risks: While offering attractive returns, private credit investments carry risks such as borrower default and illiquidity, which we will manage with careful selection and oversight.

Our Strategy for 2025

At Modern Capital, we remain committed to providing value to our constituent portfolios through strategic investments in Closed-End Funds and private credit. Our approach emphasizes:

• Identifying undervalued CEFs trading at attractive discounts to NAV.
  
  

• Targeting high-yield opportunities in both equity and fixed-income CEFs.
  
  

• Expanding into private credit to capitalize on attractive yields and stable returns.
  
  

• Actively monitoring leverage and risk management to ensure resilience across market cycles.
  
  

• Maintaining a diversified allocation to capitalize on growth while managing downside risk