Advisors should be directing their clients to companies that have sustainable manufacturing and distribution practices, according to Michael Bruun, global co-head of private equity within Goldman Sachs Asset Management.
The need to consider sustainability practices is crucial to selecting good investments and successful companies, Bruun said during Goldman Sachs Asset Management’s 2024 Investment Outlook Media Roundtable last week.
“I don’t think we can talk enough about sustainability and its capability to improve the companies we own,” Bruun said during the discussion about key factors that will affect the markets and investing next year and beyond.
Companies that are dealing with the transition away from fossil fuels are the ones to look at, Bruun added.
“Specifically, clean transportation, clean energy and renewable energy” are keys to future investing, he said. “Great business models are emerging there” that Goldman Sachs Asset Management is looking at.
Ashish Shah, chief investment officer of public investing within Goldman Sachs Asset Management, agreed sustainability will be a key factor for investors in the future.
“As companies diversify from fossil fuels we will see continued investment in alternative energies,” Shah noted.
On a global front, Shah said the U.S. can expect a soft landing next year rather than a recession, but other countries are in different spots in their economies. “The geo-political risks to economies may come from places where investors least expect it,” he added.
Michael Brandmeyer, the moderator of the event who is global co-head and co-chief investment officer of the external investing group within Goldman Sachs Asset Management, noted that there seldom has been a time when the differences in the economic status of regions of the world have been so stark.
Brandmeyer’s external investing group invests in a variety of channels, including private equity, hedge fund, real estate, credit, public market and ESG managers as a limited partner, secondary-market investor, co-investor or management company partner.
How well companies are dealing with and using AI also is going to be an important factor for investors to look at, Bruun said. “2023 is really the year where we all got to know about generative AI. Goldman Sachs economists estimate that it will add 1.5% to productivity growth for the next 10 years.”
For instance, advisors should be determining how well portfolio companies in particular are adopting generative AI.
But because of the rapid growth of the use of AI, security risks will be a recurring theme in the future, Shah said. “Bad actors will have increased levels of opportunity” to disrupt businesses, he said.
Analysts at Goldman Sachs Asset Management are closely watching what kind of regulations will be developed around the use of AI that could dampen the productivity gains that AI is expected to generate.
Different investment channels present a wide variety of potential for next year, according to Alexandra Wilson-Elizondo, managing director in multi-asset solutions within Goldman Sachs Asset Management. She is deputy chief investment officer of multi-asset solutions and co-chair of the multi-asset solutions investing core.
“The 60/40 portfolio worked for a long time, but not now,” Wilson-Elizondo said. “Diversification and risk management now dominate portfolio construction. For the long term, we favor over-weighting in U.S. equities.”
Investors also will find value in bonds next year, Shah said.
Investors will have to embrace this new reality and think differently about their portfolio construction, the strategists said. “This is a great time for active management,” Brandmeyer said.
Private markets will continue in their favorable status with the potential to generate good returns during various stages of the economic cycle, Bruun said.
As far as financial advisory firms themselves are concerned, mergers and acquisitions are decreasing during this time of high financing costs. “It will take time for the deal volumes to come back up,” he added. IPOs also have dropped off because of the higher interest rates.
“When people are anticipating interest rate declines, the number of IPOs will increase again,” Bruun said.
The U.S. also may see a shift in the labor market back to employers having the advantage, Wilson-Elizondo said.
