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Investment Ideas 2022

Beta Gives Way to Alpha

At current high valuations, the ability to generate alpha will be more important.

Nearly all asset classes have benefitted from strong beta returns over the past 18 months, but beta returns are likely to be lower in the coming years. In today’s environment, we believe focusing on alpha generation is part of the answer. 

 

Valuations across all asset classes are near record highs, limiting room for further upside and making asset prices more vulnerable to negative news or sentiment. (Exhibit 4)

 

After nearly two years of developed market (DM) policy rates trending lower and currently hovering at all time lows, interest rates will likely rise in 2022. At the same time, bond buying by major central banks is set to fall. Low interest rates have supported higher public and private equity valuations while quantitative easing (QE) has tightened spreads for many fixed income securities. Easy monetary policy has also contributed to strong corporate earnings and margins, which now have less room for improvement. Policy normalization may not immediately reverse these trends, but it leaves less room for asset prices to move higher and potentially chips away at valuation support. (Exhibit 5)

 

Being positioned on the right side of inflation and disruption will be critical to outperformance. We believe recent trends such as growth versus value, the US versus the rest of the world and the technology sector versus diversified exposure are likely to be less pronounced than in the previous cycle as technological innovation spreads across industries and regions. At the same time, low commodity prices, which contributed to lower earnings and valuations for commodity oriented companies in recent years, have risen significantly. As a result, we expect a modest level of overall earnings growth that is more balanced across regions and sectors. We believe this environment will have a higher dispersion of returns driven by companies that are able to benefit from or withstand an inflationary environment and that have secular growth drivers. 

Exhibit 4: Expensive valuations after the bull market in every major asset class, similar to the Golden 1920s and 1950s

Source: Robert Shiller, Datastream, Goldman Sachs Global Investment Research. As of November 17, 2021.

Exhibit 5: EPS GS top-down forecasts

Source: STOXX, Goldman Sachs Global Investment Research. As of December 13, 2021.

    

Investment Ideas to Consider

Alpha's Return Potential

Weighing risk versus reward favors alpha strategies. The ability to generate alpha becomes even more important in a lower-return environment as alpha will comprise a greater portion of an investor's total returns.

 

Alpha strategies have the ability to pick securities or assets across an opportunity set that can span all sectors and regions around the world, potentially adding the benefit of diversification to a portfolio.

 

In addition to these offensive benefits, active security selection also offers defensive benefits by managing risks. For example, we believe market cap-weighted passive indices leave investors overexposed to various risks: five stocks contribute about 23% of the market cap of the S&P 500, state owned enterprises account for roughly 18% of the MSCI EM Index and about a third of companies in the US small cap universe are unprofitable. 

 

The Importance of Being Active

Being active across asset classes may be critical in this environment, though it requires focus on manager and strategy selection. For some investors taking a very long-term view and recognizing that beta returns over the past few years have been above average, active strategies with a moderate amount of alpha generation may help them achieve long-term goals, without necessarily adding a high degree of marginal risk.

 

Investors who need to continue to generate higher levels of return could consider taking more risk, potentially through long-term, less liquid alternative investments that are driven by factors less correlated to market beta, such as private secondary offerings and more complex opportunities in the private markets.

 

Alternatives and Private Assets

We prefer strategies with a wide opportunity set, such as absolute return strategies in the alternatives universe, unconstrained fixed income strategies, or global and thematic strategies within public equities. These strategies can benefit from security specific opportunities and regional differences in valuations, as well as changes in broader market conditions such as growth, interest rates or inflation. Pairing private and public investments can take advantage of differentials in valuation, growth opportunities or access.

 

The secular shift toward alternatives is likely to continue as investors look for asset classes and strategies that may offer higher returns than public markets. A combination of skilled managers and fewer constraints allow hedge funds and private market strategies to take advantage of alpha opportunities across many time horizons and transaction types. Hedge funds can further amplify their alpha generation ability with shorting. 

 

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Investment Ideas 2022

Download the full report to explore the year’s key themes.

Ready To Learn More About Our 2022 Investment Ideas?

Beta

Risk Considerations

Equity securities are more volatile than bonds and subject to greater risks. Small and mid-sized company stocks involve greater risks than those customarily associated with larger companies.

Investments in foreign securities entail special risks such as currency, political, economic, and market risks. These risks are heightened in emerging markets.

Hedge funds and other private investment funds (collectively, “Alternative Investments”) are subject to less regulation than other types of pooled investment vehicles such as mutual funds. Alternative Investments may impose significant fees, including incentive fees that are based upon a percentage of the realized and unrealized gains and an individual’s net returns may differ significantly from actual returns. Such fees may offset all or a significant portion of such Alternative Investment’s trading profits. Alternative Investments are not required to provide periodic pricing or valuation information. Investors may have limited rights with respect to their investments, including limited voting rights and participation in the management of such Alternative Investments. 

Alternative Investments often engage in leverage and other investment practices that are extremely speculative and involve a high degree of risk. Such practices may increase the volatility of performance and the risk of investment loss, including the loss of the entire amount that is invested. There may be conflicts of interest relating to the Alternative Investment and its service providers, including Goldman Sachs and its affiliates. Similarly, interests in an Alternative Investment are highly illiquid and generally are not transferable without the consent of the sponsor, and applicable securities and tax laws will limit transfers. 

An investment in Private Equity is speculative with a substantial risk of loss. An investment in private equities is not suitable for all investors. Investors should carefully review and consider their potential investments, risks, chargers and expenses before investing. Private equity investments are speculative, highly illiquid, involve a high degree of risk, have high fees and expenses that could reduce returns, and subject to the possibility of partial or total loss of capital. They are, therefore, intended for experienced and sophisticated long-term investors who can accept such risks.

Glossary

Alpha: Alpha refers to returns in excess of the benchmark return.

Beta: Beta is a measure of the volatility of a security in comparison to the market as a whole, as measured by an index or other benchmark. 

EPS: Earnings Per Share.

MCAPJ Index: The MSCI AC Asia Pacific ex Japan Index captures large and mid cap representation across 4 of 5 Developed Markets countries and 8 Emerging Markets countries in the Asia Pacific region.

MSCI Emerging Market Index: The MSCI Emerging Markets Equity Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.

MSCI Europe Index: The MSCI Europe Index is a free-float adjusted market capitalization index that measures the performance of large- and mid-cap equities across 15 developed countries in Europe.

P/E: The price-to-earnings (P/E) ratio is the ratio for valuing a company that measures its current share price relative to its earnings per share (EPS).

S&P 500 Index: The S&P 500 Index is the Standard & Poor's 500 Composite Stock Prices Index of 500 stocks, an unmanaged index of common stock prices. The index figures do not reflect any deduction for fees, expenses or taxes. It is not possible to invest directly in an unmanaged index.

Stoxx 600 Index: The Euro Stoxx 600 Index represents the performance of 600 publicly-traded companies based in one of 18 EU countries. 

General Disclosures

The views expressed herein are as December 31, 2021 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.

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.

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.

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.

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Indices are unmanaged. The figures for the index reflect the reinvestment of all income or dividends, as applicable, but do not reflect the deduction of any fees or expenses which would reduce returns. Investors cannot invest directly in indices. 

The indices referenced herein have been selected because they are well known, easily recognized by investors, and reflect those indices that the Investment Manager believes, in part based on industry practice, provide a suitable benchmark against which to evaluate the investment or broader market described herein. 

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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.

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Date of First Use: January 12, 2022

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