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In The Spotlight
In The Spotlight
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When the pandemic first hit, decisive actions and coordination from global policymakers put many economies back on track. But from a monetary policy perspective, uncertainties have only intensified. The yield curve has flattened, the Eurodollar curve is now pricing an earlier start to hikes that would progress at a faster pace and end at a lower level than a year ago.
Source: Goldman Sachs Asset Management, Bloomberg. As of December 2021.
Inflation will remain a key driver for macro uncertainties in 2022. Overall, we expect the path for inflation to remain elusive for most of the year. With price stability the top Fed priority given the improvements in the labor market over the past year, we expect the US central bank to be highly data dependent and its policy uncertainty to add to market volatility.
Source: Goldman Sachs Asset Management, Bloomberg. As of December 2021.
We expect Equities to remain attractive given strong earnings. Private credit looks attractive, however, quality of high yield issuance is expected to deteriorate. We are less constructive on developed market government bonds given the potential tightening of central bank policy. The EM complex is facing a highly uneven inflation landscape, and the growth-inflation interplay can become even more delicate to navigate Still, attractive opportunities in select markets remain.
Source: Goldman Sachs Asset Management, Haver Analytics. As of December 2021.
Notwithstanding the overall constructive outlook, we would like to note a couple downside risks to our view.
Macro Front: A Fed policy error of tightening too much too soon can hurt risky assets and potentially curb inflation below target with negative implications on economic growth.
Pandemic Front: Omicron, or a new variant, may lead to a significant decrease in economic activity once more. Related, supply chain disruptions may take longer to be resolved and any reorganization of supply chains could partially roll back globalization, reducing global growth and boosting inflation.
Geopolitical Front: Lastly, unexpected major geopolitical events can disrupt markets and the outlook. Against this backdrop, we remain cautiously supportive of risky assets in 2022, expect choppy markets and underscore the need for a dynamic investment approach and careful risk management to navigate the potentially treacherous market conditions ahead.1
1 The portfolio risk management process includes an effort to monitor and manage risk, but does not imply low risk.
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