Goldman Sachs Asset Management Releases Investment Outlook for 2024
NEW YORK, November 16th, 2023 - Investors have adapted to pandemic disruptions, rising geopolitical risks, and soaring inflation, but adjustments will be necessary in a world of greater growth volatility, higher capital costs, and geopolitical instability. The new year promises more return dispersion across asset classes, sectors, and regions, with complex choices and tradeoffs.
“We believe investors will need dynamic solutions to successfully navigate change in 2024. Active strategies for traditional and alternative investments that can help deliver alpha will be important, along with diversification and risk management. Long-term disruptive trends in sustainability and technological innovation, including artificial intelligence (AI), should lead to exciting new realities,” said Michael Brandmeyer, global co-head and co-chief investment officer of the External Investing Group (XIG) at Goldman Sachs Asset Management.
Goldman Sachs Asset Management expects several key themes to affect global financial markets and investment strategies in 2024:
Fixed Income: Bonds are Back but Focus on Quality. 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. Yield has returned but so has dispersion, underscoring the value of active management and astute selection.
Negative yielding bonds have shrunk from a $18 trillion peak in late 2020 to almost nothing. Investors may earn 4-6% yield lending to high-quality companies, twice the 2009-2019 average.
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.
The emerging market (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.
“After more than a decade of low rates, widespread investor sentiment that there is no alternative (TINA) to equities finally has turned. There are reasonable alternatives (TARA), such as core fixed income, including high-quality government bonds. Fixed income is experiencing greater inflows than equities in the US and the same trend relative to cash in Europe. History suggests this will continue, as bond flows tend to pick up after a hiking cycle ends. Private credit should be a bright spot,” said Ashish Shah, global chief investment officer of public investing at Goldman Sachs Asset Management.
“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. Investors can capitalize on higher funding costs by investing in cycle winners, capturing excess public and private liquidity premia and high-quality cash flows,” said Alexandra Wilson-Elizondo, deputy chief investment officer of multi-asset solutions at Goldman Sachs Asset Management.
The opportunity 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 LPs have translated to growth in assets under management and the ability to finance larger deal sizes.
“Recent disruption and volatility in the broadly syndicated market has driven market share gains in private credit. Appetites have grown for customized financing solutions, such as delayed draw term loans and PIK optionality – features more readily accessed in private credit markets. As managers seek to effectively deploy capital, origination capabilities and pipelines increasingly will be important,” said Kevin Sterling, global co-head of private credit at Goldman Sachs Asset Management.
Geopolitics: Seek Solutions for Supply Chains, Resources, and National Security. The COVID-19 pandemic, wars in Ukraine and the Middle East, and a rise in cybercrime have spurred global governmental and corporate spending.
“With 92% of leading-edge semiconductors manufactured in Taiwan, governments and global corporates have committed significant capital to reshoring and near-shoring critical supply chains. These investments will accelerate in 2024 as stimulus dollars in the US, Europe, and Japan are released. There should be compelling investment opportunities in semiconductors, semi capital equipment, industrial automation, and industrial equipment companies,” said Mr. Shah.
“National security threats are growing in magnitude and complexity, driving wider need for the latest defense technologies. Companies positioned to benefit as the US and other NATO countries increase their spend on high-tech surveillance and deterrence should do well,” continued Mr. Shah.
Disruptive Technology: AI, Software, Healthcare, and Biotech Hold Promise. When beta is less likely to drive returns, alpha generation becomes even more critical. This makes skill in finding the likely winners of tomorrow crucial. 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.
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, providing substantial benefits.
“Structural growth in the pharma outsourcing sector will continue as the biopharma industry continues its transition from a primarily fixed to a primarily variable cost structure. This presents attractive opportunities in outsourced service providers,” said Jeff Bernstein, co-head of healthcare private equity investing at Goldman Sachs Asset Management.
Healthcare providers need solutions for rebased wages, staffing shortages, supply chain inflation, depressed consumer demand, clinician burnout, and reimbursement headwinds.
“Combatting margin degradation in physician practices and healthcare systems will create opportunities for investors in companies focused on clinical productivity tools, patient engagement technology, practice management software, the management of revenue cycles, scheduling & workforce, and supply chain and spend,” said Mr. Bernstein.
In public markets, biotech has sold off indiscriminately, back to valuation levels not seen in 15 years.
“The number of small-cap biotech companies trading below balance sheet cash is close to historical highs, creating ripe M&A targets for acquirers. Many unprofitable companies will not be able to survive the higher rates, which should improve quality and present compelling opportunities,” said Jenny Chang, portfolio manager of fundamental equities at Goldman Sachs Asset Management.
As AI workloads ramp up in 2024-2025, needs for more observation, monitoring, and data management should drive further software and cloud strength.
“The advent of generative AI has opened up new cyber opportunities, and new threats. Brand new threat vectors are emerging, as bad actors use AI to change the nature of attacks and enhance their sophistication. This increases the importance of data governance and security, security information and event management (SIEM) technologies and the data they collect, along with zero trust architectures. A subset of vendors that have scale, massive data sets to train models on, and true platforms will be better able to cross-sell and upsell, benefiting disproportionately,” said Brook Dane, portfolio manager of fundamental equities at Goldman Sachs Asset Management.
“We are in the very early stages of the data center build-out to enable enterprises to run AI workloads. Cloud service providers are aggressively ramping up capital expenditures – a trend we expect to persist well into 2026. While the market has been focused on a very narrow set of leaders in 2023, a broader set of vendors may benefit from this spending in 2024, especially as the market begins to pivot towards inference, in addition to training,” continued Mr. Dane.
Sustainability: Opportunities are Increasing in Public and Private Markets. Many investors have realized that potential sustainable investment returns are not only attractive, and significant, but increasingly competitive. Transition and “improver” funds are providing capital and financial incentives for high-carbon industry leaders to step up decarbonization efforts. Clean tech companies are compelling, particularly given the pull-back in valuations this year.
Demand for lithium-ion batteries is forecasted by 2030 to reach 4.7 terawatt-hours (or 300 gigafactories) globally, to underpin the growth of renewable electricity and electric vehicles.
“Dual focus on regional security of supply and sustainability will create opportunities in 2024 for private investment at scale across the lithium-ion battery supply chain. There is significant potential in recycling lithium-ion batteries, refining critical metals, and transitioning to lower-cost sustainable chemistries based on abundant materials, primarily sodium ion,” said Michael Bruun, global co-head of private equity at Goldman Sachs Asset Management.
“Investors are committing private capital to innovative solutions for resource efficiency and the physical effects of climate change for many critical industries, particularly around water. This intersection of software, data, and smart devices will continue to create opportunity in 2024,” Mr. Bruun continued.
To decarbonize 75% of the global economy, estimates suggest it will cost $3.1 trillion per year. Green bonds, which have gone from niche to mainstream, will be an important source of capital – since the inaugural issue in 2007, they have expanded into a $2 trillion global market.
“Investment opportunities are growing in companies with discounted valuations that have heavy environmental footprints and are transitioning their business models to reduce carbon emissions. Roughly 80% of Scope 1, 2 and 3 emissions are generated by only 22% of the public equity market. Helping these businesses transition can tangibly reduce global greenhouse gas emissions, doing well at the same time as doing good,” said Bram Bos, global head of green, social and impact bonds at Goldman Sachs Asset Management.
The leg of sustainability that investors will focus on next is 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.
Growing Private Markets Offer Inflation Hedges, Enhanced Returns, Diversification. Private market investors are staying the course. Some companies must meaningfully transform to position for the new market realities and secular megatrends. Many prefer private capital to public in order to effect this transformation privately, away from quarterly earnings cycles.
Today, with more than $10 trillion invested across private equity, real estate, infrastructure, and credit assets, the secondary market is increasingly being used by both Limited Partners (LPs) and General Partners (GPs) in need of liquidity or capital solutions across their investments.
“To adapt portfolios to new realities of higher-for-longer rates and accelerating secular growth trends, LPs can trim portfolio stakes, selling a known pool of assets to potential buyers. Similarly, secondary markets allow GPs to provide liquidity for their investors and extend hold periods for prized assets in aging funds. Structured secondary market solutions, such as preferred equity, also are being considered by both LPs and GPs who need liquidity but seek to maintain long-term exposure to their portfolios or assets,” said Harold Hope, global head of Vintage Strategies at Goldman Sachs Asset Management.
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. The tradeoff is not one asset class versus the other, but rather achieving the right balance between them.
“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 Mr. Brandmeyer.
Portfolio Construction: Thinking Differently, Staying Active, Diversifying, Managing Risk: This late in the market cycle, an integrated approach to portfolio construction can benefit from differences in public and private capital market composition and characteristics.
Global growth is beginning to diverge. Investors should look for potential triggers to re-risk, such as shifts in the Fed’s narrative, hinting at the first rate cut. This may occur when economic activity, labor markets, or inflation soften. Any evidence of negative growth globally could lead to market extrapolations of broader negative outcomes. Overreactions on sentiment and an accommodative Fed in mid-2024 could be signals to recommit to long-term risk allocations.
“With so much uncertainty about interest rates, geopolitics, and inflation, investors should think about opportunities on the edges, combined with a core portfolio and private capital allocations. Investments in global energy transition and disruptive technologies can be strong alpha drivers. Secured cash flows, high-quality underwriting, and strong collateral in private credit can contribute good yields that are useful in riding out higher base rates,” said Ms. Wilson-Elizondo.
About Goldman Sachs Asset Management
Bringing together traditional and alternative investments, Goldman Sachs Asset Management provides clients around the world with a dedicated partnership and focus on long-term performance. As the primary investing area within Goldman Sachs, the business delivers investment and advisory services for the world’s leading institutions, financial advisors, and individuals, drawing from a deeply connected global network and tailored expert insights across every region and market. Goldman Sachs has $2.7 trillion in assets under supervision globally as of September 30, 2023. Driven by a passion for their clients’ performance, Goldman Sachs Asset Management seeks to build long-term relationships based on conviction, sustainable outcomes, and shared success over time.