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Investment Ideas 2022

INFLATION UNCERTAINTY

Prices have been rising but for how long?

Prices rose just about everywhere in 2021. Most of the causes—supply and labor shortages, rising energy prices, pent-up consumer demand, aggressive fiscal stimulus—can be traced directly to the Covid-19 pandemic. And as we're reminded almost daily, the pandemic isn't over. With supplies constrained and demand strong, anxiety about inflation is on the rise.

 

For much of 2021, many of the forces stoking inflation appeared to be transitory. Supply disruptions, including raw material and labor shortages and congestion at ports, severed key links in global supply chains, forcing up prices at a time when demand for goods was strong. Some of the resulting cost pressures may ease as supply chains are repaired and the effects of pent up demand start to fade.

 

But transitory may not mean the rate of inflation will fall quickly in 2022. Prices for some goods, including shelter, may continue to rise above their pre-Covid-19 levels for some time. Autos are another wildcard; inflation has been high in this sector and could remain so if semiconductor shortages are not resolved until 2023. Solid wage growth and inflation expectations (Exhibits 1, 2) are also likely to prevent a swift return to the low inflation environment that has persisted in recent years, though the effects will vary across economies. Wage pressures in particular appeared to be a key factor behind the US Federal Reserve's late 2021 policy pivot toward tighter monetary policy. If goods prices don't ease and price pressures expand due to the demand for services as economies fully reopen, we could see a further increase in inflation above the Fed's 2% average target. Though it hasn't happened yet, sustained higher inflation could push up intermediate bond yields and take the 10-year US Treasury yield above 2% for the first time since mid-2019, potentially causing problems for longer duration fixed income strategies and growth stocks. 

Exhibit 1: US ECI experienced its strongest annual rise since 2001 in Q3 

Source: Macrobond, Goldman Sachs Asset Management. As of 2021 Q3.

Exhibit 2: UK private sector wage growth is high but moderating

Source: Macrobond, Goldman Sachs Asset Management. As of September 2021. Three month moving average.

If health concerns fade, we believe an increase in labor force participation may help temper wage growth. A slowdown in commodity price gains may also reduce inflation expectations. Still, in this uncertain environment, investors may want to consider tilting toward strategies that have typically done well when prices rise given the potential for inflation to run warmer than it did during the last cycle, if not quite as a hot as it did in the 1970s.

  

Investment Ideas to Consider

Equities

Equities have historically given investors the best chance of outperforming inflation over the long term. Even so, we believe active management is essential, as inflation will affect different companies in different ways. For example, managers who can tilt toward companies that are somewhat shielded from rising prices or likely to benefit from them, such as energy producers or firms with low labor costs or resilient supply chains, may be able to generate higher returns relative to strategies that track a benchmark. 

 

Real Assets

More specifically, cyclical equities tend to have a higher representation of sectors that stand to gain from inflation, such as financials, energy and basic materials. Additionally, real asset equities (real estate, infrastructure) may prove resilient as prices rise, since many leases and contracts are linked to inflation and incumbent asset values tend to increase when land, labor and material costs rise.

 

Multi-Sector Credit and TIPS

Multi sector credit strategies that can tilt toward floating rate bank loans and bonds from companies with robust revenue growth and pricing power may do well in an inflationary environment. Treasury Inflation Protected Securities (TIPS) won't offer the same level of diversification but can protect against unanticipated inflation and offer a potential complement as rates rise and inflation regimes shift.

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Inflation

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.

Bonds are subject to interest rate, price and credit risks. Prices tend to be inversely affected by changes in interest rates. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. An investment in real estate securities is subject to greater price volatility and the special risks associated with direct ownership of real estate.

Concentration in infrastructure-related securities involves sector risk and concentration risk, particularly greater exposure to adverse economic, regulatory, political, legal, liquidity, and tax risks associated with MLPs and REITs.

Glossary

US Employment Cost Index: A quarterly economic series published by the Bureau of Labor Statistics that details the growth of total employee compensation.

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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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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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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Date of First Use: January 12, 2022

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