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Investment Ideas 2022

Looking Beyond US Equities

It may be time to diversify into other regions and global thematic strategies.

The S&P 500 rose 28% in 2021, once again outperforming non-US markets. In fact, annualized returns for the S&P 500 over the past 10 years are more than double the MSCI Europe Index and three times the MSCI Emerging Markets Index.

 

We think US equities could still generate strong returns but the balance of risk and reward points to diversifying into other regions, global thematic strategies and sub asset classes, such as small caps. We highlight three key reasons: unique risks to US equities, weaker drivers of recent US equity returns and the potential opportunity cost of not investing in other markets.

 

US equities have two particular vulnerabilities versus other regions: valuations and concentration. Valuations for US stocks are high relative to their own history and relative to other regions the S&P 500 still trades at a premium even after adjusting for its larger weightings to higher valued sectors, such as technology (Exhibit 6). 

 

Exhibit 6: US equities are at a premium to the rest of the world also when controlling for sector composition

 

Source: FactSet, Goldman Sachs Global Investment Research. As of September 30, 2021.

 

The US equity market is also exceptionally concentrated—which is not the case in most other major equity markets. Roughly 20% of the market capitalization of the S&P 500 is in just five stocks1, leaving investors overexposed to these companies, some of which may also be subject to increasing regulation and taxes. 

 

Some of the key drivers of recent US equity outperformance may not be as pronounced going forward. The US equity market benefitted from the extraordinary growth and performance of the technology sector over the past decade (Exhibit 7). We believe technological innovation will continue to drive growth in the US tech sector, but we don t expect the same rate of growth and multiple expansion in the coming decade as technological innovation spreads across sectors and around the world. As a result, US earnings forecasts for the next couple of years look more in line with other regions, suggesting more similar equity market performance.

 

Exhibit 7: Net Income contribution by sector to S&P 500, 1976-2021

Source: Compustat, FactSet, Goldman Sachs Global Investment Research. As of September 30, 2021.

 

Record-low interest rates over much of the last decade also helped fuel both corporate growth and the equity rally in the US, but rates are now set to rise. For active investors, US equities can still offer exposure to secular growth trends and companies that can benefit in an environment of rising inflation and interest rates. But the cost of missing out on strong secular growth opportunities in other regions could be high. As alpha becomes more important in a lower return environment, investors may benefit from having the widest opportunity set possible and not limiting investments to the US. 

      

Investment Ideas to Consider

Thematic Investing

Global thematic strategies that transcend traditional classifications based on region, market capitalization or sector are more targeted ways to capture secular growth driven by innovation, sustainability or changing consumer trends. These portfolios seek to take advantage of alpha opportunities across all sectors, market caps and regions­—including the US to maximize returns.

 

Opportunities in EM, Euro Equities

Non-US equities, such as EMs, Europe and Japan, may be attractive complements to US equities, and are currently trading at lower valuations for potentially similar levels of earnings growth. EM are highly exposed to secular growth trends such as increased spending from millennials: for example, Chinese millennials are expected to overtake US millennials in aggregate income over the coming decade fueling a consumption boom. EM also have sizeable exposure to commodities, which may be helpful in an inflationary environment. The MSCI Europe Index has more cyclical exposure than the S&P 500, offers higher-dividend yields and is home to leaders in sustainable investing: eight out of the 102 of biggest clean energy companies are in Europe. Valuations and earnings growth for Japanese companies also look compelling in a Covid-recovery catch-up economy. Within the US, we see potential opportunities in small-cap stocks.

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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?

Looking Beyond

1 As of December 31, 2021.

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.

Environmental, Social, and Governance (“ESG”) strategies may take risks or eliminate exposures found in other strategies or broad market benchmarks that may cause performance to diverge from the performance of these other strategies or market benchmarks. ESG strategies will be subject to the risks associated with their underlying investments’ asset classes. Further, the demand within certain markets or sectors that an ESG strategy targets may not develop as forecasted or may develop more slowly than anticipated. 

Glossary

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

CPI: The Consumer Price Index (CPI) measures the prices of consumer goods and services and is a measure of the pace of U.S. inflation.

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.

RPI: The Retail Price Index (RPI) measures the change in the price of goods and services purchased by consumers for the purpose of consumption.

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.

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Date of First Use: January 12, 2022

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