David Lebovitz and Jared Gross conduct an annual asset allocation draft for 2024. They discuss the economic outlook, Fed policies, fixed income market analysis, asset allocation strategies for various regions, insights on real estate and high-yield investments.
Adding duration to fixed income portfolios can be beneficial in a soft landing environment with potential rate cuts.
US large cap equities are recommended due to their higher quality assets, resilience in the tech sector, and solid cash positions.
Commercial real estate is an intriguing opportunity within real assets due to prevailing interest rates and potential for price appreciation in underperforming segments.
Deep dives
Outlook for 2024: Soft landing expected with decelerating inflation
Looking back at 2023, the year exceeded expectations with better-than-expected growth, decelerating inflation, and strong performance in the S&P 500. Looking ahead to 2024, a soft landing is anticipated with continued deceleration of inflation and slower growth. This macro backdrop may provide the Federal Reserve with more flexibility and potential room for modest easing if it aligns with their base case of trend growth and inflation approaching the 2% target.
Fixed Income: Adding duration and favoring high yield
In the fixed income market, it is suggested to add duration to portfolios, especially for those sitting in cash. Despite an inverted curve, cash is expected to have diminishing yields as the Fed eventually starts cutting rates. High yield bonds are identified as an interesting opportunity due to tight spreads attributed to a higher quality sector. Furthermore, as there may be more ratings migration between investment grade and high yield, capturing fallen angels and rising stars could offer attractive opportunities in the high yield space.
Public Equity: US large cap remains a solid choice
US large cap equities are recommended due to their higher quality assets, resilience in the tech sector, and solid cash positions. While alternative global markets like Europe, Japan, and China offer mixed signals, US large cap stocks are viewed as a safe choice. With the S&P 500 expected to reach 5,000, the return potential of equities is comparable to the coupon on high yield bonds, making them an attractive option for investors looking for risk exposure.
Real Assets: Commercial real estate as an interesting opportunity
Within real assets, commercial real estate is identified as an intriguing opportunity, as the prevailing interest rates have flowed through to the asset prices. Sectors like life science, multi-family, industrial, and logistics infrastructure are considered attractive areas to allocate capital. Real estate offers greater potential for price appreciation, especially in the more underperforming segments. Additionally, the resilience of real estate assets to inflation and the ability to capture nominal growth in revenue streams add to their long-term appeal.
Alternatives: Private equity favored for risk-adjusted returns
Among alternative investments, private equity stands out for its potential risk-adjusted returns, especially in an environment of slower nominal activity. The decline in purchase price multiples for buyouts suggests a repricing and an opportunity for private equity to generate favorable returns. While private credit has grown significantly, caution is advised due to underwriting standards potentially weakening in a crowded market. Nonetheless, private credit can still be a structural allocation, and opportunities exist in distressed managers and secondary markets.
David Lebovitz, Global Market Strategist, Multi-Asset Solutions and Jared Gross, Head of Institutional Portfolio Strategy, conduct their annual asset allocation draft across various asset classes, and make their picks for the most promising investment opportunities in 2024.
Remember Everything You Learn from Podcasts
Save insights instantly, chat with episodes, and build lasting knowledge - all powered by AI.
