Menu Our services in the selected location:
  • No services available for your region.
Select Location:
Remember my selection
Your browser is out of date.


CIO Macro and Market Observations from Multi-Asset Solutions

August 30, 2022  |  5 Minute Read

Maria Vassalou, PhD

Co-Chief Investment Officer, Multi-Asset Solutions

Maria Vassalou, PhD

Amy Yifan Zhou, PhD

Multi-Asset Solutions

Amy Yifan Zhou, PhD


Given the backdrop of monetary tightening, slower growth, and geopolitical tensions, investors have started to assess whether the US and global economy is likely to plunge into a recession. While the probability and timing of a significant downturn are hard to estimate precisely, markers such as funding stress and credit risks can indicate a buildup of systemic risks. Additionally, developments in non-bank financial institutions have posed new challenges to financial stability, where regulation is still in early stages. Ultimately, not all adverse shocks will lead to system-wide failures but it’s prudent to identify market vulnerabilities and build downside protections preemptively.


Funding Risk

Financial institutions typically engage in liquidity and maturity transformation in different time horizons. During times of distress, funding costs can ramp up quickly due to surging demand for liquidity and higher counterparty risks. After the March 2020 turmoil, measures of funding costs have remained largely muted, yet this year’s macro shocks have led to periods of renewed stress. For example, the Forward Rate Agreement Minus Overnight Index (FRA-OIS) spread is a key indicator of funding risks. The spread may grow when the market demands higher risk premium, and in the wake of the Russia-Ukraine war, it widened to nearly 40 bps in early March and has remained somewhat elevated as recession fears continue to weigh on market outlooks (See Exhibit 1). While the current levels are not particularly alarming, funding market stress tends to accumulate rapidly with far-reaching ripple effects, and should be tracked closely in an environment where markets are susceptible to abrupt dislocations from economic surprises and geopolitical uncertainties.


Exhibit 1: Borrowing costs are rising but still below 2020 levels


Source: Bloomberg, Goldman Sachs Asset Management. As of 8/24/2022.


Credit Risk and Macroeconomic Spillover

Credit risk from corporates and sovereigns is another key aspect to monitor. Corporate spreads widened throughout the first half of the year, before falling back slightly during the summer rally; sovereign credit default swap (CDS) spreads have also come under more pressure on the back of a fragile outlook and country-specific event risks such as Italy’s political instability (See Exhibits 2 and 3). Currently, outlooks for global growth and corporate earnings have begun to weaken, with prospects particularly challenging for European economies that rely more on energy imports. A weaker euro is making energy costs more expensive for consumers and corporations, and plans for energy rationing could further dampen economic activities. Additionally, stagnant growth can in turn weigh on the strength of the euro and make prices even more prohibitively high. To help restore price stability and prevent inflation from becoming further entrenched, global central banks are expected to maintain the pace of monetary tightening. Therefore, credit conditions are expected to tighten, making defaults more likely.


Exhibit 2: Credit conditions are getting tighter in Europe…


Source: FRED, Goldman Sachs Asset Management. As of 8/24/2022.


Exhibit 3: … and Italian Sovereign CDS levels are rising


Source: Bloomberg, Goldman Sachs Asset Management. As of 8/24/2022.


Stress in corporate credit can be spread through its linkages to the sovereign and banking sectors. Higher corporate insolvencies and non-performing loans can lead to deterioration of banks’ asset quality and lower tax revenue for individual states; in turn, fiscal support and corporate lending can become more restrictive when the sovereign and banking sectors are stressed. Furthermore, sovereign and banking risks are mutually reinforcing – higher sovereign spreads reduce the value of domestic government bonds on banks’ balance sheet, whereas bank instability also implies higher sovereign risk. The so-called “sovereign-bank nexus” led to prolonged periods of distress during the  European Debt Crisis1 during the 2010s and has also been observed in emerging market economies. Over the past two years, countries have taken on large public debt for COVID-19 relief and much of the financing needs were absorbed by their own banks, leading to closer linkages between the sovereign and banking sectors as well as higher risks of a negative feedback cycle.


Systemic Risk Beyond Banks

Following the 2008 global financial crisis, US and global regulators have set up comprehensive efforts for systemic risk identification and oversight. Much of the focus has been on the banking sector, which was the principal source of systemic risk propagation at the time. However, in recent years, non-bank financial institutions have grown rapidly as an alternative source of funding and financial intermediation. While there are advantages of having diversified market participants, new challenges have emerged.


For example, in the US mortgage market, non-bank lenders are currently taking up about two-thirds of origination volume, and seven out of the top-ten lenders are now non-depository institutions. During the early days of the pandemic, the industry enjoyed a brief period of low interest rates and government stimulus packages, leading to a surge in refinancing activities and therefore higher profitability for mortgage companies. However, with rising interest rates and a slowing housing market, mortgage companies are now appearing to be increasingly vulnerable. Compared to banks, mortgage companies do not have funding access through deposits, have less diversified holdings, often take on riskier loans, and are more exposed to market shocks. Many of the large mortgage firms are also involved as loan servicers. When borrowers fail to make payments, the mortgage servicer may turn to short-term credit lines or potentially be forced to sell off its own assets in order to meet liquidity needs. Conversely, distress in the mortgage companies can reduce the total amount of credit available to consumers and suppresses economic activities further.


Investment Implications

To protect portfolios from downside risks, it is prudent to go beyond monitoring day-to-day fluctuations and further identify systemic risk concerns that may propagate and amplify financial distress. Currently, funding and credit risks appear moderate compared to earlier periods in the year, but they should be monitored as the global economy navigates through potentially challenging periods ahead. Structural issues in non-bank financial institutions are important from a financial stability perspective, which call for regulatory enhancements but are unlikely to slow down the pace of monetary policy tightening. Fallouts in the sector can also pose meaningful disruptions to the performance of risky assets. In light of these considerations, investors should be cautious about exposures that are more susceptible to liquidity shocks or exhibit unfavorable convexity in payoffs until we see a meaningful retracement of macro uncertainty and downside risks.




Related Insights

  • August 4, 2022 | GSAM Perspectives

    Asset Management Perspectives: Inflection Points

    August 4, 2022 The macroeconomic backdrop is changing. It may be time for investment playbooks to change, too. In our latest issue of Perspectives, we examine how investors might navigate risk—and seize opportunities—as we move into a new era. Read More
  • August 26, 2022 | GSAM Perspectives

    The New Macro Realities for Real Estate: How Inflation, Rates and Recession Present New Risks and Opportunities

    August 26, 2022 The rising-tide-for-all environment in real estate seems to have ended, likely to be followed by a period of more uncertainty and dispersion. In a quickly changing macro environment, real estate investors need to focus on diversification and understanding a portfolio’s underlying drivers of return and sources of risk. Explore why we believe, more than any other time in the last decade, that investors need a nuanced real estate strategy to position themselves to be rewarded with more alpha opportunities as dispersion increases. Read More
  • July 28, 2022 | GSAM Connect

    Cold War 2.0

    July 28, 2022 The ongoing confrontation between Russia and the West has renewed concerns about a coming Cold War 2.0 which, compared to the broad ideological conflicts that took place in the 20th century, appears likely to do more damage to global economic growth and cooperation. We expect commodities to take a more central role in driving economic growth than in previous business cycles. We also believe the traditional investment playbook should be re-assessed to account for elevated geopolitical risks. Read more in this month’s edition of Macro and Market Observations. Read More


See, for example, The Economist (2011), “Staggering to the Rescue: Europe’s Troubled Banks and Broke Governments are in a Dangerous Embrace.”


Diversification does not protect an investor from market risk and does not ensure a profit.

The views expressed herein are as of the date of first use as stated below and subject to change in the future.   Individual portfolio management teams for Goldman Sachs Asset Management may have views and opinions and/or make investment decisions that, in certain instances, may not always be consistent with the views and opinions expressed herein.


Prospective investors should inform themselves as to any applicable legal requirements and taxation and exchange control regulations in the countries of their citizenship, residence or domicile which might be relevant.

This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. This material has been prepared by Goldman Sachs Asset Management and is not financial research nor a product of Goldman Sachs Global Investment Research (GIR). It was not prepared in compliance with applicable provisions of law designed to promote the independence of financial analysis and is not subject to a prohibition on trading following the distribution of financial research. The views and opinions expressed may differ from those of Goldman Sachs Global Investment Research or other departments or divisions of Goldman Sachs and its affiliates. Investors are urged to consult with their financial advisors before buying or selling any securities. This information may not be current and Goldman Sachs Asset Management has no obligation to provide any updates or changes.

Views and opinions expressed are for informational purposes only and do not constitute a recommendation by Goldman Sachs Asset Management to buy, sell, or hold any security, they should not be construed as investment advice.

Economic and market forecasts presented herein reflect a series of assumptions and judgments as of the date of this presentation and are subject to change without notice. These forecasts do not take into account the specific investment objectives, restrictions, tax and financial situation or other needs of any specific client. Actual data will vary and may not be reflected here. These forecasts are subject to high levels of uncertainty that may affect actual performance. Accordingly, these forecasts should be viewed as merely representative of a broad range of possible outcomes. These forecasts are estimated, based on assumptions, and are subject to significant revision and may change materially as economic and market conditions change. Goldman Sachs has no obligation to provide updates or changes to these forecasts. Case studies and examples are for illustrative purposes only.

Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur.

United Kingdom: In the United Kingdom, this material is a financial promotion and has been approved by Goldman Sachs Asset Management International, which is authorized and regulated in the United Kingdom by the Financial Conduct Authority.

European Economic Area (EEA): This material is a financial promotion disseminated by Goldman Sachs Bank Europe SE, including through its authorised branches ("GSBE"). GSBE is a credit institution incorporated in Germany and, within the Single Supervisory Mechanism established between those Member States of the European Union whose official currency is the Euro, subject to direct prudential supervision by the European Central Bank and in other respects supervised by German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufischt, BaFin) and Deutsche Bundesbank.

Switzerland: For Qualified Investor use only – Not for distribution to general public. This is marketing material. This document is provided to you by Goldman Sachs Bank AG, Zürich. Any future contractual relationships will be entered into with affiliates of Goldman Sachs Bank AG, which are domiciled outside of Switzerland. We would like to remind you that foreign (Non-Swiss) legal and regulatory systems may not provide the same level of protection in relation to client confidentiality and data protection as offered to you by Swiss law.

Asia excluding Japan: Please note that neither Goldman Sachs Asset Management (Hong Kong) Limited (“GSAMHK”) or Goldman Sachs Asset Management (Singapore) Pte. Ltd. (Company Number: 201329851H ) (“GSAMS”) nor any other entities involved in the Goldman Sachs Asset Management business that provide this material and information maintain any licenses, authorizations or registrations in Asia (other than Japan), except that it conducts businesses (subject to applicable local regulations) in and from the following jurisdictions: Hong Kong, Singapore, Malaysia, India and China. This material has been issued for use in or from Hong Kong by Goldman Sachs Asset Management (Hong Kong) Limited, in or from Singapore by Goldman Sachs Asset Management (Singapore) Pte. Ltd. (Company Number: 201329851H) and in or from Malaysia by Goldman Sachs (Malaysia) Sdn Berhad (880767W).

Australia: This material is distributed by Goldman Sachs Asset Management Australia Pty Ltd ABN 41 006 099 681, AFSL 228948 (‘GSAMA’) and is intended for viewing only by wholesale clients for the purposes of section 761G of the Corporations Act 2001 (Cth). This document may not be distributed to retail clients in Australia (as that term is defined in the Corporations Act 2001 (Cth)) or to the general public. This document may not be reproduced or distributed to any person without the prior consent of GSAMA. To the extent that this document contains any statement which may be considered to be financial product advice in Australia under the Corporations Act 2001 (Cth), that advice is intended to be given to the intended recipient of this document only, being a wholesale client for the purposes of the Corporations Act 2001 (Cth). Any advice provided in this document is provided by either Goldman Sachs Asset Management International (GSAMI), Goldman Sachs International (GSI), Goldman Sachs Asset Management, LP (GSAMLP) or Goldman Sachs & Co. LLC (GSCo). Both GSCo and GSAMLP are regulated by the US Securities and Exchange Commission under US laws, which differ from Australian laws. Both GSI and GSAMI are regulated by the Financial Conduct Authority and GSI is authorized by the Prudential Regulation Authority under UK laws, which differ from Australian laws. GSI, GSAMI, GSCo, and GSAMLP are all exempt from the requirement to hold an Australian financial services licence under the Corporations Act of Australia and therefore do not hold any Australian Financial Services Licences. Any financial services given to any person by GSI, GSAMI, GSCo or GSAMLP by distributing this document in Australia are provided to such persons pursuant to ASIC Class Orders 03/1099 and 03/1100. No offer to acquire any interest in a fund or a financial product is being made to you in this document. If the interests or financial products do become available in the future, the offer may be arranged by GSAMA in accordance with section 911A(2)(b) of the Corporations Act. GSAMA holds Australian Financial Services Licence No. 228948. Any offer will only be made in circumstances where disclosure is not required under Part 6D.2 of the Corporations Act or a product disclosure statement is not required to be given under Part 7.9 of the Corporations Act (as relevant).

Canada: This presentation has been communicated in Canada by GSAM LP, which is registered as a portfolio manager under securities legislation in all provinces of Canada and as a commodity trading manager under the commodity futures legislation of Ontario and as a derivatives adviser under the derivatives legislation of Quebec. GSAM LP is not registered to provide investment advisory or portfolio management services in respect of exchange-traded futures or options contracts in Manitoba and is not offering to provide such investment advisory or portfolio management services in Manitoba by delivery of this material.

Japan: This material has been issued or approved in Japan for the use of professional investors defined in Article 2 paragraph (31) of the Financial Instruments and Exchange Law by Goldman Sachs Asset Management Co., Ltd.

Colombia: Esta presentación no tiene el propósito o el efecto de iniciar, directa o indirectamente, la adquisición de un producto a prestación de un servicio por parte de Goldman Sachs Asset Management a residentes colombianos. Los productos y/o servicios de Goldman Sachs Asset Management no podrán ser ofrecidos ni promocionados en Colombia o a residentes Colombianos a menos que dicha oferta y promoción se lleve a cabo en cumplimiento del Decreto 2555 de 2010 y las otras reglas y regulaciones aplicables en materia de promoción de productos y/o servicios financieros y /o del mercado de valores en Colombia o a residentes colombianos.

Al recibir esta presentación, y en caso que se decida contactar a Goldman Sachs Asset Management, cada destinatario residente en Colombia reconoce y acepta que ha contactado a Goldman Sachs Asset Management por su propia iniciativa y no como resultado de cualquier promoción o publicidad por parte de Goldman Sachs Asset Management o cualquiera de sus agentes o representantes. Los residentes colombianos reconocen que (1) la recepción de esta presentación no constituye una solicitud de los productos y/o servicios de Goldman Sachs Asset Management, y (2) que no están recibiendo ninguna oferta o promoción directa o indirecta de productos y/o servicios financieros y/o del mercado de valores por parte de Goldman Sachs Asset Management.

Esta presentación es estrictamente privada y confidencial, y no podrá ser reproducida o utilizada para cualquier propósito diferente a la evaluación de una inversión potencial en los productos de Goldman Sachs Asset Management o la contratación de sus servicios por parte del destinatario de esta presentación, no podrá ser proporcionada a una persona diferente del destinatario de esta presentación.

Bahrain: This material has not been reviewed by the Central Bank of Bahrain (CBB) and the CBB takes no responsibility for the accuracy of the statements or the information contained herein, or for the performance of the securities or related investment, nor shall the CBB have any liability to any person for damage or loss resulting from reliance on any statement or information contained herein. This material will not be issued, passed to, or made available to the public generally.

Egypt: The securities discussed in the enclosed materials are not being offered or sold publicly in Egypt and they have not been and will not be registered with the Egyptian National Financial Supervisory Authority and may not be offered or sold to the public in Egypt. No offer, sale or delivery of such securities, or distribution of any prospectus relating thereto, may be made in or from Egypt except in compliance with any applicable Egypt laws and regulations.

Kuwait: This material has not been approved for distribution in the State of Kuwait by the Ministry of Commerce and Industry or the Central Bank of Kuwait or any other relevant Kuwaiti government agency. The distribution of this material is, therefore, restricted in accordance with law no. 31 of 1990 and law no. 7 of 2010, as amended. No private or public offering of securities is being made in the State of Kuwait, and no agreement relating to the sale of any securities will be concluded in the State of Kuwait. No marketing, solicitation or inducement activities are being used to offer or market securities in the State of Kuwait.

Oman: The Capital Market Authority of the Sultanate of Oman (the "CMA") is not liable for the correctness or adequacy of information provided in this document or for identifying whether or not the services contemplated within this document are appropriate investment for a potential investor. The CMA shall also not be liable for any damage or loss resulting from reliance placed on the document.

Qatar: This document has not been, and will not be, registered with or reviewed or approved by the Qatar Financial Markets Authority, the Qatar Financial Centre Regulatory Authority or Qatar Central Bank and may not be publicly distributed. It is not for general circulation in the State of Qatar and may not be reproduced or used for any other purpose.

Saudi Arabia: The Capital Market Authority does not make any representation as to the accuracy or completeness of this document, and expressly disclaims any liability whatsoever for any loss arising from, or incurred in reliance upon, any part of this document. If you do not understand the contents of this document you should consult an authorised financial adviser.

UAE: This document has not been approved by, or filed with the Central Bank of the United Arab Emirates or the Securities and Commodities Authority. If you do not understand the contents of this document, you should consult with a financial advisor.

Israel: This document has not been, and will not be, registered with or reviewed or approved by the Israel Securities Authority (ISA”). It is not for general circulation in Israel and may not be reproduced or used for any other purpose. Goldman Sachs Asset Management International is not licensed to provide investment advisory or management services in Israel.

Jordan: The document has not been presented to, or approved by, the Jordanian Securities Commission or the Board for Regulating Transactions in Foreign Exchanges. This material is provided for informational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. This material is not intended to be used as a general guide to investing, or as a source of any specific investment recommendations, and makes no implied or express recommendations concerning the manner in which any client’s account should or would be handled, as appropriate investment strategies depend upon the client’s investment objectives.

This material is provided for informational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. This material is not intended to be used as a general guide to investing, or as a source of any specific investment recommendations, and makes no implied or express recommendations concerning the manner in which any client’s account should or would be handled, as appropriate investment strategies depend upon the client’s investment objectives.

Date of First Use: August 30, 2022.   289683-OTU-1660784

Please enter your email address to continue reading.

Confirm Your Access

An email has been sent to you to verify ownership of your email address.

Please verify the link in the email by clicking the confirmation button. Once completed, you will gain instant access to our insights.

If you did not receive the email from us please check your spam folder or try again.