The Federal Reserve will make its final rate decision of the year on Wednesday amid investor optimism that the central bank will shift its policy and cut rates next year.

THL Co-CEO Scott Sperling told Yahoo Finance he's approaching 2024 'very cautiously' and is focusing on sectors with 'long-term secular growth trends.’

“We're certainly in a period where valuation multiples are not at the open to buy range,” Sperling said. “You need to be very careful about the kinds of companies you're acquiring and the price you're paying for them.”

Sperling’s top investment idea for 2024 is automation, adding: "It’s things that really drive productivity… not just in the broad IT space, but also in healthcare which accounts for over 20% of GDP.”

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video Transcript

- How are you approaching investment opportunities in 2024 given all of the uncertainty surrounding the Fed and what policy is going to look like?

SCOTT SPERLING: So very cautiously I think is the first thing I would note. I've been doing this for well over 40 years. And I think this is my sixth or seventh period where there's a potential for an economic down cycle. And I think we're certainly in a period where valuation multiples are not at the open-to-buy range, if you will, that you still need to be very careful about the kinds of companies you're acquiring and the price that you're paying for them.

So we're looking very carefully. We have, over the course of a couple of decades, built up very highly specialized capabilities in a couple of handful of subsectors that we think have much higher than GDP sustainable growth, really driven by strong secular growth drivers. So we tend to focus on the kinds of sectors that have less cyclical sensitivity but also have very long term secular growth trends.

I think that's particularly important right now. In many ways, that's what you're seeing in the public markets. The movement towards companies with better business models and stronger or secular growth never been stronger in the public markets where you see seven companies basically account for almost the entirety of the positive movement in the broader indices.

It's probably the most extreme example that we've seen in a long time. I think that reflects the fact that there are lots of uncertainties in the world. It's not just the Fed, it's also longer term fiscal policy that is at best uncertain but faces a reality, that is not-- it's not clear what the nature of the policy solutions are when you're taking debt to GDP from 100%, which is already up from about 50% over the course of the last decade to over 180%.

And many believe it will be over 220% over the next 20 years. That puts a nature-- that puts a squeeze on so much else that's going on. Now, I do believe that the ability of companies, particularly in some of these technology-related areas, both in life science and information science, to do the kinds of amazing things that we've seen American companies do over the course of the last century is a very positive thing.

And I think we're seeing an acceleration in some of those trends. When you look at generative AI, when you look at what's going on more broadly in life science, one can continue to be optimistic, even in the face of what I believe will be significant fiscal headwinds.

- And Scott, I believe you're starting to get into it there. Even in your evaluation of sectors with less cyclical sensitivity, is there a top idea then that's emerged for 2024?

SCOTT SPERLING: I think looking at automation and things that really drive productivity, and that's again not just in the broad IT space but I think also in health care, which continues to account for over 20% of GDP. I think there's an emerging crisis in that we have a system for funding health care that is completely inadequate to the task at hand.

And the need to create efficiencies without cutting back on our clinical capabilities. I think automation across every element of what we do in business really started with distribution warehouse, industrial, now moving to the white collar office space is a very attractive area to invest behind because again, it's what's needed in order to overcome some of these other uncertainties and headwinds that we have both in the business community and, I think, globally against the economies-- both of the developing world and the developed world.