The biggest investment trends advisors need to pay attention to right now are the rise of alternatives, small caps over large caps, and AI and blockchain, according to three strategists who spoke at the Invest in Women conference last week in West Palm Beach, Fla.

The panel featured Jenny Johnson, president and CEO of Franklin Templeton; Kristina Hooper, chief global market strategist at Invesco; and Moira A. McLachlan, senior national director of core allocation strategies and senior investment strategist at AllianceBernstein. The panel was moderated by Tracey Longo, the Washington editor for Financial Advisor magazine.

“The biggest trend shaping the industry is the movement toward alternatives, and it is not going backwards,” Johnson said. “The big challenge is being able to democratize access to that.”

Right now, she continued, U.S. banks can’t lend any more to their customers due to capital requirements. There is also a steadfast reluctance on the part of companies to go public as early as they did in the past.

“In 2000, they were going public after three years, in 2019 it was nine to 10 years, by 2023 it was 14 to 15 years,” Johnson said. “There are now half the number of public equity companies, and five times the number of private equity-backed companies.”

Since those companies still need debt the banks won’t provide, the result is a massive proliferation of private credit.

When it comes to investment, there are five sub-trends—what Johnson calls the five Ds—influencing where investors should put their money: demographics (as the aging populations in developed countries are going to be a drag on the economies of those countries), deglobalization, disinflation, digitalization and decarbonization.

“While ESG has become a blue state-red state issue in the U.S., the reality is governments that represent 90% of the world’s GDP have committed to net-zero,” she said. “Outside the U.S., there is still a huge focus.”

And whether an investor has hopes for a soft landing or an ongoing ride with the Magnificent Seven, the panelists themselves trended toward optimistic.

Hooper said she expects the Fed to start cutting interest rates by the end of the second quarter, as historically in inflationary cycles the Fed began cutting rates at around eight months following its last hike, which in this case was the summer of 2023.

“So that would put us in that second quarter range,” she said. “If we look at how much has been done on disinflation thus far, even though the journey has been imperfect, today’s policy is very restrictive. I’m pretty confident if we see a cut by the end of the second quarter, and about 75 to 100 basis points this year, we’re likely to avoid a recession.”

While that sounded like good news, McLachlan had a slightly different take.

“A soft landing is still a landing, not without its bumps,” she said. “We’re starting to see a slowdown in lending. That will cause distress in certain pockets of the economy. And of course the consumer has burned through the excess savings that were accumulated during the pandemic, so they have a lower cushion.”

U.S. Equities: The rally and opportunities
With an eye on the current equities market rally, McLachlan said investors as always should ignore market gyrations and stay focused on the bigger picture. Since going back to 1949, 43% of the time the S&P 500 was trading at a high or near a high, she said, adding that choosing to wait for lower prices would be foolish.

“We always start the client conversation with what are the goals, what’s the time horizon, the risk tolerance, etcetera, and set that strategic asset allocation that drives 80-plus percent of returns,” she said. “And we know the number one way investors undermine their success over time is trying to time the market.”

That said, everyone has a point of view on investments, and McLachlan said hers considers concentration of investment.

“Through the first nine months of last year, 90% of S&P 500 returns were driven by the top 10 names. That broadened out into the ‘everything rally’ of the fourth quarter, and its broadened out further this year,” she said. “This is something that is quite healthy.”

As of last week, she said, some 20% of the companies listed in the S&P 500 were hitting 52-week highs. “Which means 80% weren’t so if you look beyond those top performers, there certainly are opportunities.”

Hooper said she expects to see large caps take a backseat to small caps in 2024, as the markets discount reacceleration in the economy.

“One catalyst will be the start of rate cuts, and I think we’ll see an improvement in real income,” she said.

Another promising area is cyclicals like materials and industrials, she said, which have significant potential.

Johnson agreed that the broadening of the market was a sign of health, though she said she expected the “Mag7” would continue their reign.

“If I wanted to make you afraid, I’d say that the top seven stocks are more concentrated than at the dot-com peak. But the reality is these are really good, profitable companies,” she said. “So it’s a different story.”

AI and Blockchain
As no investment discussion is complete without mentioning AI, Johnson called the present moment “early innings” that, if nothing else, are demonstrating how useful generative AI can be.

Franklin Templeton, for example, built a bot to answer help-desk queries, and it answered 100% of the questions and 60% of them were closed after the first response by the bot, she said.

“So with that you can start to understand the productivity gains,” she said.

Another area of interest to Johnson is blockchain, which is a payment mechanism, allows smart contracts to be executed without any individuals being involved, and is a “source of truth” for ownership.

“That is going to open up a lot of new investment opportunities that are going to be really interesting, and I encourage our equity teams to pay attention to the bad word ‘crypto’ because in there are companies that are going to be disruptive,” she said.