Best ideas across asset classes

Section 4: Best ideas across asset classes

• Equities
• Fixed income
• Real estate
• Real assets

Equities

Saira Malik

Best ideas

• We are focused on higher-quality stocks with earnings efficiency.
• We particularly favor dividend growers, which tend to offer strong free cash flow levels and solid profit margins.
• We also like infrastructure companies that can weather both higher inflation and softer economic growth.

Investment positioning

Equities have enjoyed strong gains so far in 2024 thanks to economic resilience earlier in the year and solid corporate earnings. However, volatility picked up over the summer due to weakening economic data. At the same time, valuations have become less favorable and interest rates remain relatively high. All told, these factors lead us to remain overall neutral toward global stock markets. For the most part, we favor a focus on higher-quality segments, leaning toward industries and geographic regions that offer both valuation and fundamental tailwinds. Likewise, we have a less positive view toward areas with a higher degree of economic or interest rate sensitivity.

Geographically, we think U.S. equities offer the best combination of defensive characteristics and growth opportunities. AI growth trends remain a strong structural tailwind for the U.S. (even as tech stock prices have declined). In the U.S., we prefer large caps over small (which tend not to do as well when economic growth is slowing), and believe it makes sense to focus on defensive areas such as dividend growers and infrastructure.

Outside of the U.S., Japanese equities look compelling given the country’s emergence from deflation and solid real wage growth. And for investors with higher risk tolerances, we see opportunities across select emerging markets such as Brazil (which should also benefit from the AI acceleration).

Private equity markets continue to struggle, but should benefit from lower interest rates. In particular, we are more favorable toward secondary private equity markets, where demand is stronger and should continue to grow.

Fixed income

Anders Persson

Best ideas

• Our highest conviction themes center around a flexible and diversified multisector approach, with a focus on finding attractive yields rather than looking for spread compression.
• For municipal bonds, we favor high yield municipals, which offer compelling yields and appear attractively valued.

Investment positioning

We believe both the macroeconomic backdrop and market fundamentals favor fixed income investments. Inflation continues to slowly ease across most areas of the world, and the Fed finally joined other central banks in lowering interest rates, which should provide tailwinds for the global bond market. We are not forecasting dramatic declines in rates over the next year, but we believe yields should decline modestly over the course of 2025. Even if rates remain elevated, current yields still offer compelling income.

Amid this backdrop, we think it makes sense to adopt a generally neutral duration stance (critically, investors still holding high levels of cash should consider lengthening duration). At this point, we believe markets have mostly priced in interest rate declines, which argues against longer duration. Note, however, that we think it makes sense to lengthen duration in municipals. The muni bond curve remains steeper than the U.S. Treasury curve, which provides the potential for current income as well as total returns when and if rates decline.

As the interest rate environment shifts, we think (all else being equal) floating-rate debt looks less attractive than fixed rate. Broadly syndicated loans have historically performed well in Fed cutting cycles, but as of now we favor high yield, where investors can still lock in relatively high fixed rates. In particular, we are focused on higher quality areas of high yield (BB/B), which should hold up relatively well amid slowing economic growth. We also like securitized assets, which offer attractive valuations across the asset-backed and commercial mortgage-backed areas of the market.

Municipal bonds enjoy strong and stable credit quality; state and local governments have solid balance sheets and ample liquidity; and the municipal market features attractive supply/demand dynamics. We see significant opportunities in taxable municipals for non-U.S. investors and are focused on the high yield and specialty- and property-tax-backed areas of the muni market.

We also remain constructive toward private credit markets, especially if we only experience a mild slowdown or shallow recession.

Real estate

Donald Hall

Best ideas

• We remain focused on “global cities” experiencing growing, educated and diverse populations, with a particular focus on the health care, industrial and housing sectors.

Investment positioning

We believe private real estate continues to emerge from its bottoming process as technical headwinds fade. Falling interest rates should be a plus for real estate, and we are seeing increased investor demand. Competition for new deals is increasing among real estate investors, which is a healthy sign for the asset class.

From a sector perspective, the office segment remains troubled, and we do not believe that vacancy rates have peaked. Eventually, office prices should fall to the point that they offer value, but we are not yet at that point. In contrast, we see broad opportunities across residential, industrial and alternative real estate. Areas like medical office and senior housing look compelling, as they should benefit from long-term demographic trends. We also favor data centers, which are enjoying strong demand from generative AI growth.

We favor private real estate debt over equity due to a combination of falling interest rates and strong pricing power on the part of lenders.

Real assets

Justin Ourso

Best ideas

• In public markets, our best ideas include North American senior housing (demographic trends, plus opportunities for industry consolidation) and AI-related infrastructure, especially areas like electric utilities that have yet to fully realize potential benefits.
• Across private markets, we continue to focus on investments that align with climate and digital transformations, such as clean energy generation and data centers, as well as strong global demand for protein and healthy foods.

Investment positioning

We continue to believe that public infrastructure investments occupy a sweet spot. They benefit from stillsticky levels of inflation and relatively high rates, and their essential-service nature positions them well in advance of a likely economic downturn. Our most favored areas include data centers (capitalizing on AI), North American utilities (compelling value and economic resiliency) and pipelines (with a focus on domestic energy security).

For public real estate, we think fundamentals and earnings prospects look solid, and this area of the market should benefit amid falling interest rates. We see particular value in data centers (again playing on the AI trend) and Sunbelt industrial real estate that is benefitting from increased nearshoring.

We also see compelling opportunities across private real assets. Our infrastructure investment themes are focused on ongoing digitization (such as AI-driven data centers) and clean energy transition (with a focus on electrification in the form of solar, battery storage and offshore wind). We see opportunities in agribusiness investments, including investments that focus on food ingredient processing that can reduce in-store labor at quick-serve restaurants (a growing area of the market).

We remain positive toward farmland, which tends to be relatively insulated from macroeconomic factors and geopolitical risks. Row crop margins and profits have declined, but we see compelling investments in areas featuring stronger crop diversification such as the U.S. Pacific Northwest. We also see value in non-U.S. permanent crop investments such as citrus and avocados, which enjoy rising demand.

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