Key takeaways
- Fear and uncertainty are keeping some investors on the sidelines, delaying capital deployment or holding excess cash. We don’t believe this is a winning strategy, with ample opportunities across public and private markets.
- Inflation, high energy prices and interest rate uncertainty around the globe are fueling volatility, but fundamentals look sound across private credit, municipals, real estate, infrastructure and select credit and equity markets.
- AI remains a primary market driver, but bifurcation within this trend is growing, pushing us to seek diversification in new ways.
Explore the investment outlook by section
- Fear vs. fundamentals: Views for a maturing market
- Section 2: The economy and markets: key points to know
- Section 3: Asset class heat map
- Section 4: Five portfolio construction themes
- Section 5: Our best investment ideas
Fear vs. fundamentals: Views for a maturing market
Saira Malik, Chief Investment Officer
What’s the ROI on fear?
This summer’s most financially successful movie worldwide wasn’t “The Odyssey” or the latest “Spider-Man” entry, but “Obsession” — an independent horror film made on a shoestring budget. While its box office gross (no pun intended) was dwarfed by the big blockbusters, its estimated return on investment was exponentially greater, at +68,800%. Two lessons learned: (1) higher profile doesn’t always mean higher profit, and (2) focusing on fear can deliver powerful results.
In financial markets, fear has been playing out in various ways. Sometimes it’s shown up as FOMO, as investors double down on the artificial intelligence (AI) narrative so as not to miss out on this dominant driver of market returns. Other times, the fear has been that the ROI on this year’s nearly $1 trillion in AI-related corporate spending won’t justify such a massive capital commitment.
Additional fears include concerns surrounding private credit markets, opaque valuations and exposure to the AI threatened software sector. Meanwhile, soaring tech stocks have raised the specter of a bubble. And since FOMO gets its own acronym, why not one for the fear that’s keeping trillions of dollars of cash on the sidelines? FOBI (Fear Of Being In) certainly has a ring to it.
The goal isn’t simply to label these fears but to avoid their clutches, like a movie character at the top of the basement stairs who actually heeds the audience’s cries of “Don’t go down there!” To that end, we encourage building diversified portfolios that are less vulnerable to jump scares on the downside and less reliant on bandwagon adrenaline on the upside: portfolios allocated to asset classes with sound fundamentals.
You don’t need a sixth sense to unearth these investment ideas, but you can’t conjure them out of thin air either. Deep asset class expertise, rigorous bottom-up research and thoughtful risk analysis are all necessary to identify where fear-based narratives diverge from underlying reality.
As detailed in this quarter’s “Five portfolio construction themes,” we foresee no letup in AI capital expenditures (capex). But the dialogue around AI has grown more complicated, which should broaden the opportunity set while increasing the need for selectivity. In credit markets, our favored categories include senior loans, securitized assets, and U.S. and European core middle market direct lending, all featuring attractive fundamentals. U.S. municipal bonds remain compelling as well, bolstered by strong state and local finances. The budding recovery in private real estate, both debt and equity, appears intact. Major real estate equity benchmarks, for example, have delivered multiple consecutive quarters of positive returns yet still offer attractive entry points.
Given the many ways to put cash to work, investors whose FOBI keeps them on the sidelines risk having their long-term investment outcomes haunted by the ghost of missed opportunity.
It’s natural to be jumpy when things go bump in the night — or in the markets. Our updated asset class heat map and senior investment leaders’ best ideas provide insights that may help investors banish any phantoms lurking outside their portfolio door. At the end of the day, we believe illuminating the darkness works better than covering your eyes. Think of it as investing with the lights on.
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Endnotes
Sources
All market and economic data from Bloomberg, FactSet and Morningstar
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