Are there still opportunities in stocks and bonds after their recent rallies? Yes, say executives at Goldman Sachs Asset Management.
The Federal Reserve's higher-for-longer interest-rate policy will continue next year, Ashish Shah, chief investment officer of public investing, said in a webinar.
“That will leave us vulnerable to potential shocks, leading investors to value having bonds in their portfolio.”
With investment-grade corporate bonds yielding 4% to 6%, “you don’t have to stretch in [terms of] risk for returns,” said Alexandra Wilson-Elizondo, a managing director of multiasset solutions for Goldman Sachs Asset Management. “Investors can capitalize on high rates.”
Investment themes: political risk, energy
When it comes to geopolitical risk, “companies are very focused on volatility in geographies,” Shah said. That’s bullish for supply-chain diversity, benefiting India and Japan, he said.
Another theme is companies diversifying from fossil fuels, with continued investment in alternative energy, Shah said.
“Also, security will be a recurring theme, especially in light of artificial intelligence,” he said.
“The rise of AI increases the capability of bad actors, requiring more defense [on the part of legitimate companies]. There will be material opportunities in defense.”
Fed rate hikes 'likely over': Goldman
As for the Fed, its interest-rate hikes that began in March 2022 are “very likely” over, Shah said. “But there’s a high bar to start cutting. The yield curve is likely to steepen, with the biggest move in the middle.”
A steepening yield curve occurs when short-term interest rates fall and/or long-term rates rise. Bottom line: “there is value in 2% real [inflation-adjusted] yields,” he said.
On the consumer front, dwindling savings and high inflation are leading consumers to trade down in what they’re willing to spend. Some companies can benefit from that, Shah said. “Consumers are looking for experiences over goods. They are going back to normal behavior.”
Turning to portfolio diversification, Wilson-Elizondo said it’s important on a regional basis, and she, too, cited India and Japan as potential targets. “We expect more companies in India to become manufacturing partners,” she said.
There is a strong case for overweighting U.S. stocks short term but not long term. As for sectors, she likes health care, pharmaceuticals, steel and autos.
Meanwhile, gold and other commodities also represent attractive portfolio diversifiers, Wilson-Elizondo said.
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