Three themes are set to dominate the investment environment in the months ahead according to a Wall Street stalwart.
Goldman Sachs Asset Management has released its Mid-Year Outlook 2024 with its investment professionals sharing their views on the most meaningful market trends and potential opportunities and risks for the remainder of this year.
The major themes that it says will set the tone for the global investing landscape and will be the likely focus at least until year end are:
“Expectations of US rate cuts were repeatedly pushed back in 2024’s first half due to inflation pressures, while other central banks signaled the intent to or began to cut rates. This has created a complex and challenging environment for managing fixed income portfolios,” said Ashish Shah, Chief Investment Officer of Public Investing at Goldman Sachs Asset Management.
Shah added that balanced portfolios will be needed given the geopolitical concerns around conflicts in the Middle East and Ukraine, and the US presidential election. Meanwhile, opportunities for investors include disruptive technology led by AI, and sustainability.
With expectation of a continuation to a soft landing for the US economy along with disinflation, any urgency for the Fed to cut rates has dissipated, while some other major economies have begun cuts but are likely to do so slowly amid remaining concern about inflation risks.
Lindsay Rosner, global head of Multi-Asset Fixed Income, says that investors are not demanding too much compensation for credit risk amid the tightest credit spreads for some years.
“Corporate balance sheets are generally healthy. US companies are better able than in 2019 to service their debt, have more cash on hand, and are generating more profits. Yields on IG bonds in the US, Europe and UK are also close to their highest levels in a decade – but active bond selection is essential,” she said.
On US Treasuries, Rosner expects the yield curve to steepen further.
“Investors should adopt a dynamic strategy to manage duration and allocate to high-quality fixed income as part of well-diversified portfolios. We favor issuers in sectors that can demonstrate resilience through the economic cycle, including IG bonds of large banks and high-yield credit in industrials and energy. AAA-rated collateralized loan obligations (CLOs) are appealing for their attractive carry, supported by strong fundamentals and favorable technical conditions,” she said.
Shah noted that performance for public equities has broadened beyond the Magnificent Seven and recent US earnings seasons have been better than expected.
“The second half of 2024 may present opportunities for investors to broaden their horizons beyond the largest names, with US small caps poised to rebound, offering attractive absolute and relative valuations. Small cap companies can provide access to the higher growth potential of future mid- and large- cap leaders. Certainty around rate cuts should provide added tailwinds,” he said.
The outlook includes megatrends set to drive investment are decarbonization, digitization, deglobalization, destabilization in geopolitics, and demographic aging. However, Goldman Sachs’ professionals say many of these are at early stages.
Specifically on Generative AI, Brook Dane, portfolio manager in Fundamental Equity, says that the opportunities should broaden out from the narrow focus on certain stocks in the past year, with new winners and losers emerging.
“The shift from training to inference may increase demand for different types of semiconductors, the need for robust datasets may highlight investors’ focus on data management companies, and embedding distilled AI models on devices may kick off a new device replacement cycle. In such a rapidly changing environment, careful stock selection and active management will be critical,” she said.
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