Cambridge Associates 2024 Outlook

Notes

• Weakness in global aggregate demand will help those inflation rates that experienced pandemic-related surges continue to decelerate. We expect this will allow most key central banks to modestly cut policy rates before the end of 2024
• Three major drivers inform these views. First, credit growth in key markets is likely to remain subdued, given high interest rates and the increase in bank underwriting standards. Second, consumer spending growth is likely to either slow (United States) or remain slow (euro area and United Kingdom), given the depletion of any excess savings that accrued during the pandemic and weakness in consumer confidence. Third, numerous challenges, such as the war in Ukraine, the Israel-Hamas war, and China’s real estate crisis, will continue to weigh on sentiment and have the unfortunate potential to escalate.
• We believe the share of active strategies that outperform will increase.
• The most prominent headwinds stem from the interest rate changes we have seen in recent years. They have impacted corporate financing costs, economic growth expectations, and the relative appeal of equities versus fixed income. Taken together, we expect global equity performance will be below its long-term median of 15% in 2024.
• Value indexes saw their margin of underperformance widen as a subset of tech-related growth stocks surged in tandem with the artificial intelligence (AI) boom this year
• Value stocks have often held up better in higher rate environments, and although we expect most major central banks will cut rates modestly by the end of 2024, costs of capital will still be much higher than just a couple years ago. We expect this reality may be a headwind to growth stocks, so investors should anticipate the rate environment in 2024 will continue to remove froth from pricey growth stocks and help value outperform.
• Small caps underperformed large- and mid-cap equivalents in part due to sector tilts within the index. The small-cap index is underweight communication services and IT, two of the best performing large- and mid-cap sectors in 2023. The elevated valuation of these two large- and mid-cap sectors will make it more difficult for outperformance to continue in 2024. As investors position for rate cuts, sectors such as real estate, industrials, and materials—which are overweights in the small-cap index—should support outperformance.
• We believe the greater cyclicality of European equities sees risks tilted to weak EPS growth and continued underperformance in 2024
• Ultimately, we believe the landscape is ripe for active managers to reassert themselves in 2024. Expanded breadth of investment opportunities and IT top heavy benchmarks will be key factors in this recovery.

• But we expect the VC market will be a mixed bag in 2024. Among existing investments, we believe there will be an increase in “down rounds,” meaning valuations will decrease across financings. At the same time, we expect AI will continue to serve as a major market catalyst, supporting new investments and fund commitments.
• Private Equity Secondary Transaction Volume Should Increase to a Record Level in 2024
• In 2022 and 2023, the secondary market witnessed large fundraisings, including recordbreaking fund closings, which significantly boosted the amount of “dry powder” capital available for new investments. As we enter 2024, dry powder in the global secondaries market is projected to be around $220 billion (1.7x–2.2x recent transaction volume).
• European credit opportunities funds have returned an underwhelming 7.0% since mid-2011 against a targeted return in the mid-teens. A decade of near-zero interest rates gave corporates easy access to low-cost capital and allowed them to build strong balance sheets. Except for short periods of market dislocations or isolated cases of stress, it was mostly a challenging time for funds that specialize in providing highly structured customized solutions to balance sheet problems. But we believe this is set to change in 2024, as we expect corporates to actively look for ways to reduce interest costs and improve liquidity
• With interest costs almost doubling and operating costs remaining high, we have started to see a decline in key coverage ratios. One key metric, EBITDA-to-interest expense ratio for European buyouts, has fallen from 4.3x in 2022 to 2.5x in 2023.
• We expect equity long/short (ELS) hedge funds should perform above the industry’s long-term average in 2024, due to the considerable rise in short rebates and economic conditions within major geographic regions.
• Higher short-term interest rates have increased the short rebate to levels unseen since the GFC. In fact, a fund’s short book now generates yields greater than benchmark equity dividend yields for the first time since 2008. A higher short rebate improves potential future performance, as it lowers the cost of carrying short positions and increases the opportunity set for single-name shorts.
• In Europe, dispersion is above median among listed companies, which suggests that active stock pickers have an above-average field of candidates for longs and shorts. Economically transformative dynamics reshoring of supply chains and a wall of low interest rate loan maturities, the latter of which will peak in Europe in 2026—will lead to clear winners and losers among European companies
• Infrastructure Performance Should Rebound in 2024
• Improved valuations, a supportive policy backdrop, and an ability to grow earnings during inflationary environments mean the sector should boost investor portfolios in 2024
• An increase in benchmark bond yields, as well as profit warnings from some large renewable energy players, caused listed infrastructure assets to underperform, with US and global ex US infrastructure stocks returning -4.5% and 2.4%, respectively, year-to-date through November 30.