Investors will need to adjust in a world of greater growth volatility, higher capital costs, and geopolitical instability, according to Goldman Sachs Asset Management (GSAM). The new year promises more return dispersion across asset classes, sectors, and regions, with complex choices and tradeoffs, it said.
GSAM expects several key themes to affect global financial markets and investment strategies in 2024.
Quality fixed income
With rates expected to be higher for longer, an up-in-quality approach may help investors identify bond issuers well-positioned to withstand higher funding costs, along with a more strategic approach to private credit, according to GSAM. Yield has returned but so has dispersion, underscoring the value of active management and astute selection, it said.
Indeed, investors may earn 4-6% yield lending to high-quality companies, twice the 2009-2019 average.
“After more than a decade of low rates, widespread investor sentiment that there is no alternative to equities finally has turned. There are reasonable alternatives, such as core fixed income, including high-quality government bonds,” said Salman Niaz, head of Asian fixed income at GSAM.
In particular, fundamentals in the US investment grade (IG) corporate credit market “remain healthy, and many companies may be well positioned to withstand higher funding costs in 2024”.
“Private credit as well as pockets of emerging markets (EM) fixed income should be among the bright spots,” he added.
The EM corporate bond market also skews towards IG, with an average index rating of BBB on the Standard & Poor’s and Fitch scales, yet delivers a yield of almost 8%. This higher return potential reflects lower liquidity and less familiarity with the market, creating opportunities for managers with EM expertise, according to GSAM.
“With strong earnings and conservative M&A strategies, investors need not stretch on the risk spectrum to find strong risk-adjusted return opportunities in higher quality credits,” said Niaz.
Disruptive technology opportunities in equities
When beta is less likely to drive returns, alpha generation becomes even more critical, according to GSAM. Investors seeking to complement exposure to mega-cap US technology companies with allocations to selected large-, mid-, and small-cap technology names may be able to find secular winners underappreciated by the broader market, the US Asset manager said.
Meanwhile, large pharmaceutical and biotech companies are outsourcing some core business functions, including parts of R&D, clinical trial management and operations, drug manufacturing, medical and regulatory affairs, market access and communications, which provide “substantial benefits”.
In public markets, biotech has sold off indiscriminately, back to valuation levels not seen in 15 years, argues GSAM.
Turning to AI, demand for more observation, monitoring, and data management should drive further software and cloud strength, it said.
“While the market has been focused on a very narrow set of leaders in 2023, a broader set of vendors may benefit from spending in 2024, especially as the market begins to pivot towards inference, in addition to training,” said Nathan Lin, portfolio manager of fundamental equities at GSAM.
Sustainability prospects increase
Many investors have realized that potential sustainable investment returns are not only attractive, and significant, but increasingly competitive, according to GSAM.
For example, clean tech companies are compelling, particularly given the pull-back in valuations this year, it said.
Moreover, “investment opportunities are growing in companies with discounted valuations that have heavy environmental footprints and are transitioning their business models to reduce carbon emissions,” said Neil Mascarenhas, Asia lead of the Sustainable Investing & Innovation Platform at GSAM.
The asset manager also believes that investors will next focus on social impact, as widened socioeconomic disparities have made reducing inequality more urgent. Companies that provide social solutions to affordable housing, accessible education, and healthcare – along with financial inclusion, healthy lifestyles, and access to clean water and sanitation – should be compelling, GSAM argues.
Growing private markets
GSAM also believes that private market investors are “staying the course. Many companies prefer private capital to public to position for new market realities and secular megatrends.
At the same time, the proliferation of private investments does nothing to diminish the need for public markets that provide different opportunities, facilitate quick deployment of capital, and offer investors liquidity to shift rapidly when market conditions change.
“Perhaps because these are uncertain times, the outlook for private markets is improving. Investors should remain mindful of macroeconomics and geopolitics, including recession risks, political and military conflicts, inflation, and higher rates,” said Stephanie Hui, head of private and growth equity in Asia Pacific and head of Asia Pacific private investing at GSAM.
Yet, theopportunity set in private credit should remain attractive in 2024 owing to higher base rates, attractive spreads, and continued capital inflows. Increased allocations to private credit by Limited Partners have translated to growth in assets under management and the ability to finance larger deal sizes, according to GSAM.