Goldman Sachs Asset Management looks at trends including the AI phenomenon.   

Generative artificial intelligence (AI) has the potential to be the most profound technological development and the pace of innovation continues to accelerate, according to Brook Dane, portfolio manager in fundamental equity at Goldman Sachs Asset Management.

“Last year, the beneficiaries were concentrated in a narrow group of stocks, but the investment opportunity set is likely to broaden, creating new winners and losers. 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,” Dane said. “In such a rapidly changing environment, careful stock selection and active management will be critical.”

Goldman Sachs Asset Management believes that five key structural forces – decarbonisation, digitisation, deglobalization, destabilisation in geopolitics, and demographic ageing – will drive investment megatrends, but many of these trends are in early stages. Digitisation and technology advancements, notably generative AI, should drive long-term allocations due to the pace of disruption and potential wealth creation opportunities. Companies should focus on using generative AI for true strategic differentiation, not just efficiency gains.

“Active strategies and diversification can help deliver alpha opportunities, and investors who stay in silos and focus on one theme may miss opportunities and underestimate risks,” the firm said.

“The decarbonisation drive is unlocking opportunities in equities, fixed income, and alternatives. Clean-energy technologies continue to improve, driven by growing affordability and greater solar power and battery storage efficiency. Carbon emissions can be reduced by helping high emitters restructure their business models and reposition for a greener economy,” the firm added.

Steve Barry, global head of fundamental equity, believes that investing across three security themes could offer a broad universe for stock ideas. “Given advancements in AI, attempts by major economies to strengthen technology supply chains are likely to receive broad support. Developed markets are accelerating their transition to clean energy to increase energy independence and reduce reliance on fossil fuels. Geopolitics can be expected to drive increased defence spending in the years ahead, creating solid investment opportunities,” he said.

Equities
Ashish Shah, chief investment officer of public investing at Goldman Sachs Asset Management, believes that the second half of 2024 could 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,” Shah said.

“Europe’s improving growth and inflation mix, combined with better corporate earnings dynamics and modest valuations, bodes well for European equities. There continue to be vibrant opportunities in Japan, where structural changes are driving strong market performance after decades of deflation,” Shah continued.

Fixed income
Lindsay Rosner, global head of multi-asset fixed income thinks that investors should adopt a dynamic strategy to manage duration and allocate to high-quality fixed income as part of well-diversified portfolios. She favours issuers in sectors that can demonstrate resilience through the economic cycle, including investment grade (IG) bonds of large banks and high-yield credit in industrials and energy. “AAA-rated collateralised loan obligations (CLOs) are appealing for their attractive carry, supported by strong fundamentals and favourable technical conditions,” Rosner said.

Private markets
James Reynolds, global head of direct lending, believes that private credit should continue to see long-term secular growth, although asset allocators are under-allocated to private credit relative to targets. “Sentiment continues to be positive towards the space as investors look for diversification, and innovation is driving expansion of the private credit universe,” he said. He expects risk-adjusted returns to remain attractive for lenders who are disciplined in their underwriting: “Lenders with scale and deep sourcing who can lend through the capital stack should be best positioned. Investors should look for companies with market-leading positions in stable, defensive sectors that generate cashflow, regardless of the market cycle.” 

Hedge funds that have taken advantage of dispersion across asset classes, sectors, and regions are also performing well, according to Michael Brandmeyer, global head of the external investing: “As private market activity recovers, identifying macro dislocations, relative value discrepancies between securities, and event-driven opportunities may help to capture upside and limit downside risk.” 

Emerging markets
Meanwhile, Anupam Damani, co-head of emerging market debt investing, thinks that attractive opportunities in emerging markets can provide diversification to developed market equity allocations and enable alpha. “Reforms enacted by many emerging market countries as part of an IMF programme are not only helping to provide liquidity support through broader multilateral and bilateral funding, but also helping to provide a policy anchor for the medium term,” Damani said. “Improved market access has acted as a tonic for many lower rated and frontier market sovereigns, allowing them to refinance their near-term maturities for longer-dated financing. Some strong BB countries, although they appear fairly valued, can continue to be resilient carry stories given their positive trajectories to investment grade.”

“The emerging market corporate bond market is diverse and under appreciated, with attractive yields and exposure to secular megatrends. Emerging market corporates tend to exhibit lower sensitivity to political events compared to emerging market sovereign bonds, but a selective approach is essential,” Damani added.