As economic growth continues to slow, Cambridge Associates expects inflation to cool slightly, prompting central banks to reverse course on rate hikes.
This positions asset classes a bit differently year-over-year. Cambridge says active management, value strategies, and China are interesting plays in equities.
In the credit markets, U.S. Treasuries and direct lending are attractive investments, according to the consultant.
“We’ve seen a huge drop off in credit growth,” said Kevin Rosenbaum, head of global capital markets research at Cambridge, by phone. “Part of that has to do with the rapid rise in interest rates, but also with the banking stress. A lot of the traditional lenders have pulled back and increased their underwriting standards.”
The consultant points to falling inflation as the push that central banks need to guide interest rates to a more neutral place. In other words, we’re not going back to the heady days of the 2010s — but things will ease up a bit by the end of the year.
“With inflation moving closer to central banks’ targets and labor markets showing signs of softening, central banks will be inclined to modestly ease policy rates in 2024 to avoid overtightening,” argued TJ Scavone, investment director, capital markets research at Cambridge, in the paper. He added that the Fed is expected to cut rates by one percent next year.
That, according to the consulting firm, presents an opportunity to own U.S. Treasuries, whose yields are expected to outperform cash in 2024. Sure, Treasuries had a tough 2023. As Scavone put it in writing: “In our view, the worst is behind us.”
As far as fixed income and credit more broadly, Cambridge’s outlook for the year ahead is mixed. Although leveraged loans had another bang-up year, Cambridge expects the asset class to face headwinds in 2024. On the liquid credit side, the firm prefers securitized assets like investment-grade CLOs.
On the private credit side, Cambridge believes that European opportunistic funds and direct lending strategies will “outperform their long-term averages” thanks to high yields and less credit available from traditional lenders.
In 2024, Cambridge expects existing venture capital-backed companies to have more ‘down rounds,’ which will lower their valuations. Data from the consulting firm shows that implied multiples on invested capital fell from their highs of 3.2x in December 2021 to 2.2x in June 2023.
Although the multiples are still higher than pre-pandemic levels, falling valuations may entice investors to put capital to work that has been sitting on the sidelines.
“I always make the distinction between existing investments in private equity and venture capital and new commitments,” Rosenbaum said.
Although investors’ commitments to private strategies from 2018 through 2022 may suffer the consequences of the overheated market at the time, funds raised in 2023 and 2024 will likely be strong vintage years. Investors who choose to commit capital could benefit as a result.
Within public equities, the firm expects performance to sit below its long-term median of 15 percent — but that doesn’t mean Cambridge is recommending that its clients sell off holdings.
“We are not advocating for investors to cut equity risk right now in favor of fixed income risk,” Rosenbaum said.
