CONTENT BLOCKS
2024
INVESTMENT
OUTLOOK
February 26
BY P&I CUSTOM CONTENT
IN PARTNERSHIP WITH

OVERVIEW

Institutional investors in 2024 face a new era of higher interest rates, tighter credit conditions, and greater market volatility from macro and geopolitical headwinds, the impacts of which are still evolving. Several asset classes now show a wider dispersion of returns which has put renewed focus on manager selection and experience through different market cycles. Despite the market complexities, asset owners can find plenty of opportunities in selective sectors and segments, as these leading asset managers share: Allspring Global Investments for fixed income; BlackRock for equities; Goldman Sachs for private credit; and Macquarie Asset Management on real assets.

I

A TIME TO SHINE FOR FIXED INCOME

Fixed income rating: favorable
P&I Illustration

“Now is a good time to be a bond investor,” especially given the recent increase in fixed-income yields on the back of the Federal Reserve’s interest rate hikes to combat inflation, said George Bory, chief investment strategist for fixed income at Allspring Global Investments. “Bond yields, both nominal and real, are materially higher today than they were just a few years ago. It’s historically a very attractive time for investors to increase their allocation to bonds and hold that allocation over an extended period of time,” he said. Despite some market volatility ahead, investors can find opportunities across the yield curve and enable better cash flow matching and fixed-income sector exposures to meet their risk-adjusted return targets.

“The macro backdrop is bond-favorable due to three factors: slowing global growth; lower inflation, which is really disinflation; and ongoing tight monetary policy,” Bory said. Following the rapid rise in U.S. interest rates from effectively zero to 5.5% over the past two years, “real yields are attractive over the medium term, whether for government bonds, investment-grade bonds or high-yield bonds, at anywhere from 100 basis points positive up to 500 basis points positive.”

“Long-term bond investors who are aiming to outpace inflation over time still have opportunities to get invested, stay invested and expand that investment. They can build inflation-beating, predictable cash flows that should perform over the medium term,” Bory said.

Monitor all indicators

Yet it is not all smooth sailing ahead, considering the uncertainties about the pace of economic growth and inflation, as well as the timing of the Fed’s next moves, all of which could lead to bond market volatility. To navigate through it, Bory said, “you have to be nimble, you have to be opportunistic, and you have to preserve some degree of flexibility in your portfolio.”

You have to be nimble, you have to be opportunistic, and you have to preserve some degree of flexibility in your [fixed-income] portfolio.
George Bory
Allspring Global Investments

While the Fed has signaled that it will cut rates, “what’s unique about this cycle is that the Fed is more focused on [lowering] inflation rather than [the impact on] growth. This is unprecedented. In the past, the Fed did not cut rates in response to inflation without a notable slowdown in growth. We’re in unchartered waters,” he said. That signals that bond yields are unlikely to move in a smooth and orderly manner.

Allspring’s fixed-income team forecasts U.S. growth will slow modestly to 1% to 1.5% this year, while inflation will likely move closer to the Fed’s 2% target, though it may not fully reach that goal.

Fixed-income investors also need to monitor the technical backdrop, particularly in the Treasury market, with higher issuance expected over the coming months and perhaps years, as the U.S. government needs to fund its debt, Bory said. In addition, “the lower bond yields [available today] are likely to induce many refinancing waves, whether on the mortgage side or even the corporate side,” he said. “We would expect an upsurge in issuance with a mixed-demand equation, as demand for bonds ebbs and flows — that suggests that volatility could persist. These technical issues are very manageable but could pose challenges for different types of bond investors.”

Read: Income Generator—Road map 2024

Ride the curve

“Picking the right point on the yield curve is really important for investors, and one of the unique outcomes for 2024 is likely to be how the curve ultimately shifts,” Bory said, particularly in light of the Fed’s stance to calibrate monetary policy to lower inflation. “This suggests that the curve should steepen, but not all yields may come down. The front end is likely to come down much faster than the long end,” he said. “Over time, the long end could start to rise again simply because the Fed is stimulating the economy at a time when growth is still fairly robust.”

This shifting yield-curve scenario will present meaningful opportunities for investors, Bory said, pointing to specific segments that are poised to benefit. “The sector opportunity is likely to be in mortgage-backed securities and short-to-intermediate credit, particularly in the lower-rated parts of the market: double-B, triple-B and single-B ratings,” he said. “These offer significant yield advantages but also capture the steeper front end of the curve.”

Emerging markets could be another area of opportunity that will benefit from the Fed’s interest rate moves and the resulting weakening of the dollar. Lower rates are “likely to help highly indebted countries, along with those with dollarized and commodity-based economies around the world as front-end borrowing rates come down. Countries like Mexico, Brazil and a few in Asia should all benefit from a weaker U.S. dollar,” he said.

Take a customized route

Allspring has seen investors meaningfully increase their allocation to multi-sector strategies such as core plus, for yield and diversification — and that typically requires active management. Over the next 12 to 24 months, when “interest rate volatility is high and credit volatility is low, a core-based strategy should be attractive,” Bory said, adding that core-plus should outperform over the longer term. Investors are able to segment the different sectors within the core and core-plus universe — from core investment-grade assets to additional sectors, such as high-yield bonds, loans, currencies and foreign currency-denominated debt — and take a customized path to meet their cash flow and liability streams, he said.

“Maintaining allocations in various credit sectors is important, as is defining quality, not just by rating, but by the strength of the borrower,” Bory said. To assess strength, Allspring’s fixed-income team conducts ongoing analysis of companies’ balance sheets, and it has found high-quality borrowers at every rating level.

Another area of growing interest is in sustainable fixed-income — as long as the strategies are clearly defined, Bory said. “The challenge is defining exactly what sustainable means, as well as what we as investment managers can deliver.” Allspring’s sustainable offerings utilize the firm’s proprietary credit research, which is aligned with the Paris Climate Agreement. “We have focused our efforts to provide global climate-transition strategies [that] are very clearly defined,” he said.

Greater precision ahead

Looking ahead, Bory anticipates innovation in fixed income will be powered by the acceleration of three key trends: duration and cash flow matching, sector segmentation and separately managed accounts. A common theme is greater precision in meeting investors’ specific objectives, supported by data advances and portfolio-management tools.

Trend No. 1: “Duration and cash flow matching will increase,” Bory said. “Bonds are nothing more than a cash flow, and when yields are high, you can create very robust cash flow strategies.” No. 2: Institutional investors will continue to focus on sector segmentation to achieve better returns and risk management. “Looking across sectors around the world allows us to create very specific portfolios, which enables large asset owners to precisely allocate their money across different risk spectrums in fixed income,” he said.

Read: Riding the Curve: Beyond Goldilocks

No. 3: Improvements in technology and data will allow fixed-income managers to build customized portfolios for retail investors, who will be able to match their cash flow needs much like institutional investors, Bory said. “Over the last few years, retail has made a meaningful move into laddered portfolios and individual separately-managed accounts. Customized bond portfolios allow the individual to create a cash flow stream that meets their own liabilities and return objectives.”

II

OPPORTUNE TIME FOR SKILLED STOCK PICKERS

Equities Rating: moderately favorable
*Favorable for alpha opportunity; moderately favorable on broader market
P&I Illustration

The bell has rung on the long period of easy money post the global financial crisis, one in which the S&P 500 delivered unique double-digit returns of 17.4% per year versus its historical average of 7.9%. “We’re in a new era,” said Tony DeSpirito, global chief investment officer of Fundamental Equities at BlackRock. Going forward, equity returns are more likely to be akin to the 8% historical average, and “institutional investors are going to need to pay more attention to alpha-generating sources of investment returns” to achieve their objectives.

In other words, stock picking through active management is becoming a bigger part of investors’ overall return profile. Beta, or market returns, simply won’t cut it in 2024 and beyond.

“The good news is that the opportunity set for stock picking is literally the most robust I’ve seen in, say, 20 years, in terms of more cross-sectional stock price volatility,” DeSpirito said. “When we look at companies, we see more dispersion in terms of their profitability metrics and their valuations. And that means more opportunity for a skilled manager.”

When we look at companies, we see more dispersion in terms of their profitability metrics and their valuations. And that means more opportunity for a skilled manager.
Tony DeSpirito
BlackRock

Instructive context

Investors are focusing on when the Federal Reserve might begin to cut interest rates, and by how much, now that inflation seems largely contained, though still above the central bank’s 2% target. “We might be through this bout of inflation, but it won’t be the last bout that the Fed has to deal with. And that has investment implications,” DeSpirito said, as stubborn inflation and higher rates are among the underlying drivers of equity returns that are likely to move closer to historical averages as well as higher volatility than that seen during the “easy-money” period.

Read: Taking Stock: Q1 2024 Equity Market Outlook

In the nearer term, the historical context of what happens to equity market performance following the end of rate-hike periods can be instructive. In fact, equities — particularly quality and low-beta stocks — typically have outperformed in periods after the central bank stops raising rates. BlackRock research shows that from August 1984 to the end of 2021, during the 12 months after each peak in interest rates, equities gained 17% on average, as measured by the Russell 1000 Index. Among equities, quality stocks rose 26% and low-beta stocks rose 23%, and those gains only widened in the second and third years after the rate peaks.

Rate Hike Halt Historically Good for Quality and Low Beta Equity performance in years after peak rates, 1984 – 2021 Rate Hike Halt Historically Good for Quality and Low Beta
Past performance is not indicative of current or future results. Indexes are unmanaged. It is not possible to invest directly in an index.
Source: BlackRock Fundamental Equities, with data from the Board of Governors of the Federal Reserve System and Bloomberg, calculated from Aug. 31, 1984, to Dec. 31, 2021. Returns are calculated from the month when the Fed stops raising rates for peak rates periods in 1984, 1989, 1995, 2000, 2006 and 2018. All equities represented by the Russell 1000 Index. Quality is the top quintile of stocks as ranked in the Russell 1000 Index using a proprietary research screen that assesses companies on 13 “quality” metrics. High and low beta (a measure of volatility relative to the broader market) are derived from the BlackRock Fundamental Equity Risk Model (BFRE).

Shifting sands

Investors are navigating a different macro environment today, one that is still being played out. “We’re in a period of low unemployment; less globalization and increased reshoring, which is redoing supply chains; and a massive shift toward decarbonization,” DeSpirito said. In addition, demographics are shifting with the shrinking of the working-age population, particularly with the aging of the baby boomers in the U.S. All of these are inflationary and, taken together, could constrain equity returns, but they also point to investment opportunity for skilled stock pickers, as individual companies will navigate the changes with varying degrees of agility and success.

Another dynamic for investors to keep in mind is the starting point for equity valuations today. “Valuations are much higher. You can see that in the P/E ratios today versus 2009 or 2010,” he said. “That, combined with higher rates and a less accommodative monetary policy, suggests returning to more normal rates of return for markets overall.”

Focus on quality stocks

Greater stock dispersion has created a strong opportunity in quality stocks, companies that have the capacity for sustained earnings growth, even if economic growth slows. “You would think that quality stocks would normally trade at a premium to the market. Today they are trading at a discount to the market,” DeSpirito said. And given the wide valuation spreads, there are “opportunities in value investing that we have not seen in a decade or more.” Even globally, he added, “valuations across different countries have widened as well. So, the opportunity to spot and select stocks across the globe is wider than normal.”

DeSpirito counts health care and technology among the sectors that are most attractive, and one of the main reasons is the innovation that’s transforming these industries. In technology, for example, artificial intelligence is an evolving theme, with the potential to create winners and losers. In health care, the development of diabetes drugs with positive weight-loss side effects offers similar potential. “Both sectors grow faster than GDP and both have a lot of high-quality companies,” he said. “We look at the types of sectors that are particularly ripe for stock pickers. They are areas where you can really excel as an active manager.”

Read: Equity investing for a new era: The return of alpha

Tilt toward active

Institutional investors concerned about either a recession, too-high stock prices or both should look to active managers to navigate what could be a challenging environment. During the Fed’s long easy-money period of low interest rates and quantitative easing, investors could get high returns from market beta alone, and passive strategies could deliver. In the current more supply-constrained era that is expected to exhibit greater dispersion and higher volatility across markets, passive strategies may disappoint expectations.

That means “it’s time to rethink how much of your portfolio is in active, with the bias toward increasing that,” DeSpirito said.

“When you evaluate asset managers, you want to make sure the managers you hire do what they say they do and that their portfolios reflect their philosophy. What I would call truth in advertising or truth in labeling. That’s step one,” he said. “Then you want to see managers that are very process focused, because you want to hire someone with a repeatable process. And you want to have someone who has durable competitive advantages in stock research and alpha generation.”

BlackRock can harvest its benefits of scale, while honing its approach through its unique research structure — “a hybrid approach, which is a cross between centralized research and boutique-based research,” DeSpirito said. “What that allows is for the research to be very narrowly tailored to the philosophy of the investment team, but at the same time, you have access to the depth of research from across teams,” he said. Data is also a critical part of the Fundamental Equities approach, and the firm is using AI to harvest the value of that data, he said. “We use a similar hub-and-spoke model, where data leads are embedded in the portfolio teams, but then they come together centrally to share best practices.”

Stay alert

Although DeSpirito is relatively sanguine about the equity market in 2024 and the decline in chances of a recession, he said the economy and equity valuations bear watching. “The late economic cycle is a risk. There’s not a lot of slack in the economy right now.” Still, investing in equities at economic junctures like today’s has proved to be beneficial, he noted, and investors can find opportunities in high-quality and low-beta stocks.

The valuation concern is similarly narrow because the market’s headline valuation is concentrated in a relatively small number of stocks. “The S&P 500 looks expensive, but it’s really because of a handful of very expensive stocks,” DeSpirito said. “There are a lot of stocks at reasonable valuations to be found.”

III

PRUDENT EXECUTION IN PRIVATE CREDIT IS KEY

Private Credit: favorable
P&I Illustration

Private credit benefited from higher interest rates in 2023, thanks in part to the floating-rate nature of the asset class. This year, even with the turn in the interest rate cycle and with rates expected to move lower, “the opportunity set continues to be very attractive,” said Greg Olafson, global head of private credit at Goldman Sachs. Institutional investors should still expect double-digit returns, and while returns could be slightly lower than last year, they could be attractive on a risk-adjusted basis, he said.

Achieving those returns, however, “will come down to the opportunity to deploy capital and to have access to the right client franchise. As we look ahead, we see a lot of opportunity to lend to high-quality companies,” Olafson said, particularly for experienced private credit managers deploying capital through robust deal pipelines with private equity sponsors.

Ongoing pressures

Following the Federal Reserve’s recent rate increases, the higher cost of debt has put pressure on borrowers, making some workout situations — when a borrower defaults and the loan terms are renegotiated — inevitable. “As companies that borrowed in the low-rate environment run up against their maturities and their rate hedges, their cost of debt will reset higher,” Olafson said. That could create pressure on companies that are not growing enough or driving sufficient revenue to offset the higher costs, and ripple effects could then inject stress into the market.

We have to ensure that in this somewhat euphoric moment for private credit, we don’t lose sight of the fact that it’s a business rooted in prudence, in execution, in application, in diligence.
Greg Olafson
Goldman Sachs

But those situations are likely to be on a case-by-case basis — private credit is not facing systemic risk from higher rates, he said. Whether it’s the PE-backed sponsors or the private credit managers, the asset class has “very sophisticated practitioners who have flexible mandates, and they can work through challenges in the portfolio in a constructive way, provided there is a sound business reason for extending that maturity, providing more capital or amending terms.” Private credit lenders, moreover, have more control and flexibility over key factors, such as duration, covenants and amortization payments. “That is a very important aspect of private credit. The borrower works with the lender,” he said.

Both the higher cost of debt for borrowers and investor uncertainty around valuation price discovery contributed to lower transaction volumes last year, Olafson noted. But with the resilient U.S. consumer and low unemployment underpinning strength in the economy, the Goldman Sachs Asset Management private credit team expects M&A volume to be higher this year. “The cost of debt coming down a bit helps, and also the valuation uncertainty is attenuating a bit,” he said. Deal activity picked up in the third quarter last year, and “in our transaction volumes in our credit business, Q4 was far and away the strongest quarter of the year,” he added. “We see that continuing in the new year.”

Follow the track record

While the potential for increased deal flow is good news for private credit investors, the challenge is finding a hands-on manager who has a track record of access to quality deal flow and has worked through credit situations across differentiated market cycles. That’s even more true today in a more crowded private credit industry, where credit providers from other market segments have come in with a more lax view on deal terms to gain entry, Olafson said.

“You should be very focused on the prudence, expertise and long track record of who you’re working with. Look at their access to quality deal flow, because the fact is that many of these deals price the same: The terms are not that different, and terms will ebb and flow based on demand and supply,” he said.

Read: Building Private Credit Portfolios

Private credit will continue to win over corporate borrowers, said Olafson. “One might argue that the private credit solution is a superior solution because you’re dealing with your direct lender, who can provide certainty and flexibility and — now — the size that’s equivalent to what the public markets could historically deliver.” But “at the end of the day, it all comes down to credit underwriting standards, and the most important determinant of that is the quality of the business you lend to,” he said.

Labor-intensive business

“It’s a labor-intensive business,” Olafson said. “These are directly originated, directly underwritten and directly negotiated deals that require resources and people.”

A private credit manager needs to be active and engaged with its portfolio companies. It requires both resources and experience to navigate through any complex situations that could arise as companies respond to shifting market conditions. “You need to be able to think like an owner,” Olafson said. Goldman’s private credit team, he pointed out, works with the firm’s PE team and its value accelerator team that helps enhance the value of its portfolio businesses.

Private credit managers are offering more sophisticated terms to borrowers, with hybrid solutions being active in the second half of 2023 and likely to continue over the next two years, he said. These are for situations where “these are good companies, but their growth may be a little behind plan, which means that their debt is maturing before the owner is ready to sell. They may need to add some new capital to grow the business further,” Olafson explained. Potential hybrid solutions could include extending maturity, a structural financing to bring in more capital, a secondary offering or a strategic sale by the PE owner.

Sectors to watch

Two sectors with potential for opportunity in 2024 are health care and software, both of which have exhibited strong growth and have seen a lot of PE-backed activity over the past few years.

Health care is a fundamentally sound industry, which is one reason why PE managers are drawn to providing debt financing to health-care organizations. “They have strong demographics, strong innovation, significant barriers to entry and they’re capital efficient,” Olafson said. But the health-care industry, in particular, faces tight labor conditions, which can drive wage inflation.

Read: Default and Recovery Rates in Private Credit

Software, also a fundamentally sound industry with a solid and recurring customer base, could find that an economic slowdown would induce corporate customers to reduce spending, or at least not increase it. That would make it harder for these companies to refinance or raise new capital at reasonable rates. “It’s, perhaps, in disappointing growth where the risk lies,” Olafson said. In both health care and software, “there’ll be a lot of opportunities, and there may be some challenges as well,” he added.

The secular, long-term transition away from fossil fuels to renewable energy sources is another area ripe for private credit investment. This transition, which is still in its early stages, will require heavy amounts of investment, both equity and debt capital. “Innovation around energy efficiency, the energy transition and decarbonization is an opportunity that will require a lot of capital, and there will be opportunities to lend and invest against that,” Olafson said.

Focus on execution

Regardless of how the economy performs in 2024, companies in health care, software, energy and other segments will continue to need fresh capital and refinance existing capital, providing private credit managers with deployment opportunities throughout the year.

Today “it’s all about the quality of the transaction: The A-credit book is built one deal at a time,” Olafson said. In a more complex market environment that needs the steady hand of an experienced private credit manager, “we have to ensure that in this somewhat euphoric moment for private credit, we don’t lose sight of the fact that it’s a business rooted in prudence, in execution, in application, in diligence,” he said.

IV

OPPORTUNITY AND RESILIENCE IN REAL ASSETS

Real assets rating: Moderately favorable
P&I Illustration

Institutional investors have been increasing allocations to real assets, especially real estate and infrastructure, over the last several years. They have been drawn to these sectors for their ability to deliver long-term risk-adjusted returns on a par with equities but with lower volatility.

“As long as these asset classes can continue to deliver that objective, that trend should remain in place,” said Daniel McCormack, head of research at Macquarie Asset Management. In 2024, “investors will be adding to real estate because it’s a cyclical opportunity, and infrastructure is also generally well positioned because it’s a very defensive asset class,” he said.

As we analyze how infrastructure performs under different GDP growth conditions, we find that when GDP growth is low, infrastructure performs relatively well against other asset classes.
Daniel McCormack
Macquarie Asset Management

Lower inflation and falling interest rates are two key macroeconomic forces that should support real assets, while slowing growth or recession could hold back an upward advance. “It’s going to be a tug of war for risk assets between falling interest rates on the one hand, which will be a tailwind, and slowing growth on the other, which will be a headwind,” McCormack said.

Macquarie is closely monitoring how much economic growth could slow and how far rates could decline to determine their impacts on real assets, as well as other asset classes. The firm’s view is that Europe and the U.K. are already in a recession and that the U.S. faces a high risk of recession, which could lead to dampened growth likely through the first half of 2024.

The good news, though, is that inflation has proved to be well behaved recently, which has enabled the Federal Reserve to pivot toward a rate-cutting policy. “Normally, the headwind from slowing growth is more powerful than the tailwind from falling rates, but it depends upon how aggressive the growth slowdown is and how far interest rates are cut,” said McCormack. “I suspect the [European Central Bank] and the Bank of England will also be cutting rates this year; so we expect falling interest rates will be some offset to the headwinds from weaker growth.”

Supportive factors

Declining interest rates are particularly good for real estate, which is more sensitive to rates than other real assets, such as infrastructure. McCormack pointed out that turning points in monetary policy have often corresponded to the bottom of property cycles. With the Fed poised to cut rates sometime this year, property is positioned to be a cyclical opportunity for institutional investors. “Property could start to look really quite interesting over the course of 2024,” he said.

“We prefer to invest in the real estate subsectors that have strong underlying demand and underlying growth,” McCormack said. Rental housing tops the list because of demand, which is coming from changes in demographics and migration. “Demand for rental properties is likely to remain strong for a while,” he said. (See chart.)

Broad measures of housing rental growth remain high Broad measures of housing rental growth remain high
Sources: Macquarie Asset Management; MAM Real Estate Strategy, CoStar, Australian Bureau of Statistics (ABS), U.K. Office for National Statistics (ONS) and U.S. Federal Reserve Economic Department (euro zone and U.S.), as of February 2023. Charts are for illustrative purposes only.

Logistics is another area of interest. “The e-commerce trend is providing a solid medium-term growth outlook and would benefit from falling interest rates. If we do get more interest rate cuts than the market is pricing in this year, we would lean into logistics,” McCormack said. “We are more cautious on sectors like office, where there is clearly a medium-term demand problem along with some cyclical weakness.”

Defensive stance

In low-growth economic environments, infrastructure has historically performed well relative to other asset classes because infrastructure provides what consumers need regardless of economic conditions. “As we analyze how infrastructure performs under different GDP growth conditions, we find that when GDP growth is low, infrastructure performs relatively well against other asset classes. In a recession, people make compromises for things like movie tickets or luxury items, but they continue to spend on the essentials. That’s what gives infrastructure it’s strength and resilience,” McCormack said. (See chart.)

Returns versus GDP growth — Above and below average Returns versus GDP growth — Above and below average
Sources: Macquarie Asset Management; Cambridge Associates, Macrobond, Bloomberg Finance LP. U.S. equities: S&P 500 Total Return index; Infrastructure: Cambridge Associates Infrastructure index; Global equities: MSCI World index; Global bonds: Bloomberg Global-Aggregate Total Return index; Real estate: INREV Global Real Estate Fund index (GREFI) refers to core property performance gained via fund structure with low levels of leverage, and excludes land, developments, and alternative property sectors. Analysis conducted from 4Q 2003 to 1Q 2023, except the real estate index, which starts from 4Q 2004. GDP = gross domestic product. Average GDP growth over the period was 1.7%.

In the last two years, many investors have added to their infrastructure allocations because of its inflation-hedging characteristics, he said. “In the next year, they will find the defensive side of infrastructure attractive, and we expect allocations to be driven higher.”

As always, selectivity is key. “There are a lot of differences by subsector, and even by individual assets,” McCormack said. “A lot of core infrastructure assets are increasingly looking attractive,” with returns having recently moved up as risk-free rates have risen. “And, of course, they are the most defensive part of the infrastructure spectrum, as a lot of their revenues are linked to regulation,” he said.

Nuanced opportunities

Further up the risk spectrum, McCormack advises caution around assets that are sensitive to GDP growth, such as roads, bridges and tunnels. “We’re generally less positive on those, although there are some subsectors with interesting nuances,” such as ports and airports, he said. “At the moment, businesses are rebuilding inventories after a period of destocking, which is driving port volumes higher, despite signs of softening growth,” he noted. Port volumes could remain pretty healthy for at least the first six months of the year, he said, as could airport volumes, as post-pandemic travel demand remains high.

Another factor working in favor of infrastructure in 2024 is the policy backdrop, with governments around the world investing in critical communications and power infrastructure as well as decarbonization.

“The policy environment globally is supportive of infrastructure because of its big exposure to decarbonization,” McCormack said. “There have been a number of recent policy initiatives in the U.S. to support that. In Europe, there’s a constant policy tailwind behind decarbonization efforts and the path to net-zero.”

Valuation issues

The wild card for infrastructure investors is valuation. Valuations of infrastructure investments rose, along with those of other asset classes, during the low interest-rate environment leading up to and through the pandemic. But over the last two years of the rate-hiking cycle, valuations came down, pressuring the asset class.

“One of the key variables for 2024 is how far interest rates will be cut. Inflation is coming down, and that is creating, and will continue to create, some downward pressure on valuation multiples,” McCormack said. If rates fall commensurate with what is currently priced into markets, or more, Macquarie’s modeling shows the downward pressure on valuation multiples won’t last very long. However, “if we don’t get any interest rate cuts and inflation just continues to fall away, then the multiples in the infrastructure space are likely to fall further and for longer and could steadily decline through all of 2024,” he said.

Read: Explore Macquarie Asset Management's insights

Deep market knowledge

In navigating the crosscurrents within real assets, investors would be well served to find managers with deep on-the-ground knowledge and understanding of these markets. A regional focus can be helpful too.

“We put a lot of emphasis on having people in the countries where we invest and having those people engage very closely with companies, regulators, stakeholders and users of our assets,” McCormack said. “The key is to build deep, detailed knowledge and to be responsible and reliable custodians of these assets. In this more difficult environment, knowing the sectors, knowing the companies, knowing the environment and engaging with stakeholders will help to drive performance of these assets.”


Disclosure by Allspring:
This material is intended for institutional investors. All investing involves risks, including the possible loss of principal. There can be no assurance that any investment strategy will be successful. Investments fluctuate with changes in market and economic conditions and in different environments due to numerous factors, some of which may be unpredictable.

Each asset class has its own risk and return characteristics. An investment strategy that emphasizes sustainability and environmental, social and governance (ESG) characteristics may perform differently than a strategy without such an emphasis, or the market as a whole. The investment strategy may forgo investments or make investments that differ from an otherwise similar investment strategy that does not evaluate and select investments on the basis of their sustainability and ESG credentials. ESG information from third-party data providers may be incomplete, inaccurate or unavailable. As a result, there is a risk that the Investment Manager may incorrectly assess a security or issuer.

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Past performance is no guarantee of future results. [needs to be in bold] The views expressed and any forward-looking statements are as of December 31,2023, and are those of the Global Fixed Income team and/or Allspring Global Investments. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. Any and all earnings, projections, and estimates assume certain conditions and industry developments, which are subject to change. The opinions stated are those of the author and are not intended to be used as investment advice. Discussions of individual securities or the markets generally are not intended as individual recommendations.

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Opinions, assumptions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. You should consult your tax or legal adviser regarding such matters.

This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of yields or returns, and proposed or expected portfolio composition. Moreover, where certain historical performance information of other investment vehicles or composite accounts managed by BlackRock, Inc. and/or its subsidiaries (together, “BlackRock”) has been included in this material, such performance information is presented by way of example only. No representation is made that the performance presented will be achieved, or that every assumption made in achieving, calculating or presenting either the forward-looking information or the historical performance information herein has been considered or stated in preparing this material. Any changes to assumptions that may have been made in preparing this material could have a material impact on the investment returns that are presented herein by way of example.

Past performance is not a guarantee of future results. Asset allocation and diversification strategies do not guarantee profit and may not protect against loss. Risk management and due diligence processes seek to mitigate, but cannot eliminate, risk nor do they imply low risk. Investment involves risk, including a risk of total loss. Stock and bond values fluctuate in price so the value of your investment can go down depending upon market conditions. Indexes are unmanaged, are used for illustrative purposes only and are not intended to be indicative of any fund’s performance. It is not possible to invest directly in an index.

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