(Bloomberg) -- Owning “quality” stocks and bonds may seem expensive, but the trade still has further to go, according to Goldman Sachs Group Inc.
The preference for quality has been apparent for a while now in everything from U.S. shares and high-yield debt to emerging-market equities and credit, Goldman strategists Lotfi Karoui and Caesar Maasry wrote in a note Wednesday. Despite expensive valuations for assets from companies with strong balance sheets, it isn't yet time to rotate back, they said.
“We see plenty of reasons why the ‘bid for quality' will remain strong,” the strategists wrote. “For U.S. equity and credit markets, these include pressures on margin growth, and the lack of fundamental upside for over-leveraged and often secularly challenged firms.”
In emerging markets, a more positive view on low-quality stocks would require improved economic data, but so far in 2019 it has been mixed, they said.
Read about Goldman's Kostin recommending quality stocks in January.
Goldman has company from the likes of Pacific Investment Management Co. and Societe Generale SA in recommending quality shares in the current market environment. The calls come as the composition of what classifies as quality evolves -- Invesco Ltd. recently noted that almost 30% of its quality-based exchange-traded fund is comprised of technology companies.
“Whether the bid for low-quality assets eventually returns will depend to a large extent on investors' willingness to re-embrace a mid-cycle view,” the strategists wrote. “We think the bar is high.”
To contact the reporter on this story: Joanna Ossinger in Singapore at jossinger@bloomberg.net
To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Cormac Mullen, Ravil Shirodkar
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