Best ideas across asset classes

Section 5: 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 inflation and softer economic growth risks.

Investment positioning

Despite relatively elevated volatility, equity markets powered ahead through much of 2024 thanks to resilient economic growth and solid (if weakening) corporate earnings. At the same time, valuations have become increasingly stretched and interest rates remain elevated. This combination leads us to remain broadly neutral toward global stock markets.

We generally favor higher-quality segments, leaning toward industries and geographic regions that offer fundamental tailwinds. Likewise, we are less positive toward areas with a higher degree of economic or interest rate sensitivity.

Geographically, we continue to believe U.S. stocks offer the best combination of defensive characteristics and growth opportunities, although we are seeing some shifts in relative opportunities. While the AI boom should remain a key U.S. growth driver, we believe investors should broaden their allocations. We are growing more positive toward U.S. small caps that could benefit from shifts in tax policies, rising M&A activity and more protectionist trade practices.

Outside of the U.S., we are increasingly cautious toward both developed and emerging markets based on relative economic growth prospects and the likelihood of a stronger U.S. dollar. One exception is Japan, given the country’s emergence from deflation and solid real wage growth.

Private equity markets remain under some pressure (especially given still-high interest rates), but we do see value in secondary private equity markets, where demand is stronger and should continue to grow.

Fixed income

Anders Persson

Best ideas

• Securitized assets and senior loans both offer solid value while avoiding duration risks.
• For municipal bonds, we particularly favor high yield municipals, which offer compelling yields and appear attractively valued.

Investment positioning

The global macroeconomic backdrop continues to favor fixed income investments. Most global central banks are in a slow easing mode. While inflation risks remain, they are less acute than earlier in the cycle. We expect long-end interest rates to remain relatively elevated and largely range-bound over the course of 2025. But, critically, even if rates remain elevated, current yields still offer compelling income.

Given this backdrop, we think it makes sense to stick with an overall neutral duration stance (and investors still holding high levels of cash should consider lengthening duration). While the U.S. Federal Reserve and other central banks are cutting rates, we don’t anticipate quick or dramatic declines. Note, however, that we think it makes sense to adopt a longer-duration stance in municipals given that the muni bond yield curve remains steeper than the U.S. Treasury curve.

Consistent with our views on duration, we have a generally unfavorable view toward U.S. Treasuries (we see better value elsewhere) and investment-grade bonds (spreads are tight and the duration profile is longer than we prefer). In contrast, we favor high yield (especially higher quality segments that can weather slowing growth), securitized assets (where asset-backed and commercial mortgage-backed segments offer value) and senior loans (which look increasingly attractive given the higher-for-longer rates environment). We are moving toward a more neutral view on preferred securities given recent strong performance, although we see value in $1,000 par securities where spreads offer value.

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 broad opportunities in tax-backed areas of the traditional tax-exempt market, as well as in taxable municipals for non-U.S. investors. We are focused on the high yield and specialty- and property-tax-backed areas. 

We remain constructive toward private credit markets, especially if we only experience a mild economic slowdown.

Real estate

Donald Hall

Best ideas

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

Investment positioning

As highlighted in our portfolio construction themes, we believe non-office-related private real estate has already bottomed, as the capital and financial headwinds facing landlords have faded. Rent and occupancy growth are healthy, and investor demand is returning for most sectors. The improving climate is driving increased competition for real estate deals, an indicator of an impending recovery for the asset class.

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

We have a slight bias toward real estate debt over equity, given strong pricing power on the part of lenders, but that difference is narrowing.

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 see value in public infrastructure, but the combination of recent strong performance and the potential for changes in U.S. regulatory and tax policies cause us to approach this area with increased caution. Within infrastructure, we see significant opportunities in data centers and investments associated with electrification, given increased demand for power.

For public real estate, we think fundamentals and earnings prospects look solid, and this area should benefit from still-solid economic growth. We see particular value in senior housing, where supply is limited and demand is growing.

We also see compelling opportunities across private real assets. Our infrastructure investment themes remain 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 also 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 are growing increasingly cautious toward commodity investments. The likelihood of a stronger U.S. dollar and prospects for higher tariffs are likely to be negatives for this area.