Goldman Sachs (NYSE:GS) just released its mid-year outlook. The publication is called Cutting Through the Complexity and offers insights for any investors involved during the rest of 2024. The report, published by its asset management division (GSAM), considers the evolving economic landscape. It is characterized by a slower path to interest rate normalization, ongoing geopolitical tensions, and a crucial election cycle. GSAM emphasizes embracing these “New Realities” and outlines key considerations for investors across various asset classes.
Let’s take a look at a few of them:
Macroeconomy: A Longer Road to Normal
While central banks were initially expected to raise rates aggressively to combat inflation, progress on tapering price increases has relaxed these expectations. GSAM believes this extended normalization timeline necessitates active and dynamic investment strategies. For example, an allocation of fixed income can provide stability, while venturing beyond mega-cap stocks and exploring private markets offers lucrative opportunities.
Geopolitics and Elections: Two Wild Cards
Geopolitical instability and upcoming elections introduce a layer of complexity for investors. GSAM recommends balanced allocations and hedging strategies to bolster portfolio resilience. The stated reason is hedge funds and alternative investments can serve as valuable tools during turbulent market periods. Focusing on long-term trends like supply chain security, resource allocation, and national defense can also yield strategic advantages.
Tailwinds and Headwinds: Megatrend Investing
GSAM maintains its focus on key structural forces shaping the global economy, including decarbonization, digitization, deglobalization, geopolitical destabilization, and demographic shifts. These megatrends transcend short-term economic cycles and election outcomes, presenting challenges and opportunities for investors.
Equity Markets: New Opportunity
Public equities have witnessed strong performance from the “Magnificent 7,” a group of dominant mega-cap companies. However, GSAM identifies a new wave of beneficiaries emerging within the Artificial Intelligence (AI) space. These companies leverage data to enhance AI capabilities, potentially complementing the existing leaders. Careful security selection and active management of AI investments, including scrutinizing profitability, are becoming important.
The Rise of U.S. Small Caps
After a period of underperformance, GSAM anticipates a resurgence in U.S. small caps. Attractive valuations, an improving U.S. economic outlook, and the prospect of rate cuts later in 2024 all contribute to this bullish perspective. Historically, small caps have benefited from policy easing cycles and offer diversification away from the S&P 500 concentration risk.
Beyond U.S. Borders: Opportunities in Europe and Japan
Europe’s improving economic situation, combined with favorable corporate earnings and valuations, make European equities an attractive proposition. Similarly, Japan’s ongoing structural reforms and shift towards an inflationary environment are expected to bolster its equity market. GSAM highlights small caps in both regions as potential beneficiaries of these trends, particularly with anticipated rate reductions on the horizon.
Commodities: A Hedge Against Uncertainty
Investors often seek refuge in commodities when geopolitical tensions rise because they have historically exhibited hedging properties. Oil’s value as a hedge against supply disruptions is a prime example. GSAM emphasizes proactive portfolio management in the face of heightened geopolitical risks, advocating for a diversified approach across asset classes and potentially incorporating hedging strategies.
Navigating the Political Landscape
The first half of 2024 witnessed a flurry of political activity in emerging markets (EMs) and developed markets alike. GSAM analyzes the potential implications of these elections for various regions and asset classes. The upcoming U.S. election in November is a key focus, with potential policy shifts impacting global growth and asset markets. GSAM advises against attempting to time markets based on election outcomes but rather to consider the broader economic landscape.
Key Takeaway
Goldman’s mid-year outlook lays out an investor framework for understanding what to consider when navigating the shifting investment landscape in 2024. By pointing to the extended path to interest rate normalization, geopolitical uncertainties, and upcoming elections, GSAM offers actionable insights for investors seeking to capitalize on opportunities across various asset classes. From core fixed income and AI-driven equities to strategic allocations in small caps and commodities, understanding the outlook should be helpful during the second half.
