Goldman Sachs Asset Management is betting on the continued success of private credit and stocks powered by artificial intelligence.
“In a higher-for-longer rate environment, we see opportunities for investors to earn equity-like returns in private credit,” GSAM’s multi-asset solutions team wrote in an outlook that is expected to be published on Monday. “The strategy can offer incremental income generation and greater resiliency during periods of heightened volatility, serving as a potentially strong complement to traditional fixed income.”
The average yield for newly issued private debt reached 10.2 percent in the second quarter, the highest since the Global Financial Crisis, according to the report. In addition, compared to traditional fixed income products, private credit terms offer “bespoke protections and provisions.” In some cases, the customized terms can make private credit safer bets than high-yield bonds or leveraged loans, said Alexandra Wilson-Elizondo, deputy chief investment officer of multi-asset solutions at GSAM.
“One of the things that we find attractive is that, post-Covid, there was a lot of poor underwriting . . . established between the issuers and the borrowers [in the public market]. Whereas in the private credit space, there’s been a lot more focus on the individual underwriting standard,” Wilson-Elizondo said. “From that perspective, you can argue that you are seeing somewhat better terms.”
GSAM is more cautious in traditional fixed income. According to the report, “the recent banking crisis is expected to push U.S. banks to tighten lending standards further and we do not believe this tightening is fully reflected in credit spreads, which are only at median levels over the cycle and not yet an attractive point of entry.” But core bonds, especially high-quality government bonds, have a low or negative correlation to the equities market, making them attractive investments in the current environment, the report said.
Beyond private credit, GSAM also found parts of the equities market attractive in the second half of the year.
“We find this is a particularly exciting time to be evaluating AI opportunities,” the report said. “In our view, companies that are harnessing generative AI to enhance their business, leveraging predictive AI to make their business smarter, and those manufacturing the hardware to enable the proliferation of AI are set to disproportionately benefit.”
GSAM’s bullish outlook on AI-savvy companies comes after AI-related tech stocks fueled the growth of the stock market in the first half of the year. From January to June, seven companies at the forefront of AI product development — Apple, Microsoft, Alphabet (Google’s parent company), Amazon, Nvidia, Tesla, and Meta — accounted for 70 to 75 percent of the return generated by the S&P 500 index.
The remarkable surge of the “Magnificent Seven” has sparked debates among investment managers. While some argue that investors should diversify away from the large-cap tech stocks due to the increasing concentration risks, others believe that the rise of AI stocks is sustainable in the long term because their prices are justified by strong fundamentals.
GSAM belongs to the latter camp. “Currently, the valuation of tech remains within historical ranges and well below the peaks of early 2000s,” the report said.
Added Wilson-Elizondo, “If you believe in the structural adjustment that will happen as a result to AI, some of these valuations actually make sense. People and individuals are willing to pay for those multiples given the growth potential.”
