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Investment Ideas 2022: Explore three key themes dominating markets where investors might uncover potential opportunities. Read More

2021: Edition 3

MARKET KNOW-HOW | 2021: Edition 3

And Now For Something Completely Different

Market Know How Edition 3: And Now For Something Completely Different

It was exactly fifty years ago that Monty Python’s Flying Circus proclaimed “And now for something completely different.” It was also precisely fifty years ago that the US withdrew from the gold standard, thus ushering in a “completely different” era of monetary policy arrangements, inflation dynamics, and market relationships. Paradigm shifts may be infrequent but, when they occur, they can have profound consequences.

This edition of the Market Know-How coincides with another moment where the future could potentially look “completely different” from the recent past. As the global economy begins to reopen we will discover over the next few months what the new post-COVID-19 “normal” looks like: will inflation prove to be sticky in a way we haven’t seen for decades, and will central banks have an increased tolerance for that? Will taxes have to rise to recoup the costs of the fiscal largesse? Should we be recalibrating valuation models to reflect structural changes to crossmarket relationships?

The next phase of the recovery may prove to be a paradigm shift: a move into a world of “completely different” macro and market relationships to those which we have been accustomed to in recent years. Hence, the last decade’s successful portfolio allocation may require adjustments for the years ahead. In this Market Know-How we explore how some of those factors may shape the investment landscape.

We emphasize:

  • Elevating the importance of income and broadening out to non-traditional investments.
  • Focusing on strategies seeking to increase portfolio resilience and capitalize on normalizing rates and inflation.
  • Evaluating risk and return characteristics for digital assets, and staying on top of transformative trends impacting the investing landscape.

Macro & Market Views

Global Growth

The combination of strongly pro-cyclical fiscal and monetary policies in most major economies, in conjunction with households’ pent-up consumption, means that the global economy is currently enjoying its strongest period of growth in decades. Although momentum should inevitably fade as the reopening restores some semblance of normality, the global outlook for 2022 is one of continued above-potential activity. Thereafter, we expect 2023 will return to a lower but more sustainable and historically normal pace of expansion.

Source: Goldman Sachs Global Investment Research and Goldman Sachs Asset Management.
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Tax: Rates may move back to long-term averages

Expectations vs. Reality

With public spending at record highs, and tax rates at historically low levels, tax rates are likely moving higher in the future. The Biden administration has proposed to revert the top individual income rate to 39.6%, which we think could be achieved, and to raise the top capital gains rate to 43.4%, which may get negotiated down to 28%. Importantly, higher taxes should not materially change capital market opportunities. However, investors may be able to enhance their after-tax total return experience through prescriptive investment decisions.

Source: Economic Policy Institute, Tax Foundation, GIR, and Goldman Sachs Asset Management.


A Wealth of Solutions

Tax-efficient vehicles such as municipal bonds, SMAs, and ETFs, that minimize taxable distributions by taking advantage of tax-free or tax-deferred returns. Tax-loss harvesting strategies that improve after-tax returns by offsetting capital gains with realized losses. Asset location approaches that strategically place investments more subject to taxable events or have high turnover inside tax-advantaged accounts. Gain acceleration plans if it makes sense for investors to realize gains ahead of a higher tax regime.

Source: Goldman Sachs Asset Management.

Rates: Interpreting Rising Rates

Low Yields Across G7 Economies

We anticipate improving macro fundamentals will drive global rates higher, with some choppiness likely in the path forward. The economic rebound should push long-end rates higher while key dynamics such as unemployment and inflation may shift central bank reaction functions on front-end curves. Still, we expect risk assets to grind higher should rate increases remain measured and gradual, enriching the alpha opportunities across markets.

Source: Bloomberg, Goldman Sachs Global Investment Research, and Goldman Sachs Asset Management.


Rising Rate Investment Preferences

Investment solutions emphasizing 1) sensitivity to global growth, 2) lower duration, and 3) income have traditionally outperformed in rising rate environments.

Source: Goldman Sachs Asset Management.

Inflation: Transitory or Sustained?

Inflation Expectations Are Elevated

Higher inflation prints have raised concern over how long price pressures will last, despite the Federal Reserve’s assertion that this surge in inflation is transitory, driven by base effects and COVID-19 disruptions. Although we believe these temporary pressures will soon roll off, investors may see benefit in owning assets that display strong performance during periods of rapidly rising inflation expectations.

Source: Bloomberg and Goldman Sachs Asset Management.


Reflation Strategies

Equities and real assets have historically delivered solid performance in periods of rising breakevens, with the potential to provide reliable protection when most needed.

Source: Goldman Sachs Asset Management.

Valuation: Sustainably higher valuations, realistically lower returns

US Equity Valuations

Today’s elevated equity valuations may diminish return potential in the longer term, even if they do not portend a correction per se. We do not expect any imminent re-pricing of risk assets, absent renewed recessionary factors, and would be buyers of any short-term weakness.

Source: Robert Shiller, Bloomberg, and Goldman Sachs Asset Management.


Investment Adjustments

Even so, we see greater opportunities in more affordable pockets of the global equity market, particularly in a security-specific approach. Additionally, diversifying assets, or those that can secure returns through dividend income rather than capital appreciation, may benefit portfolios in a lower return environment.

Source: Goldman Sachs Asset Management.

Digital Assets: A Growing But Speculative Market

The Good, the Bad, and the Volatility

Since the creation of Bitcoin in 2009, over 11,000 cryptocurrencies have been established and the market has grown to more than $1.6tn. Interest has been driven by speculative sentiment, potential equity and inflation hedging capabilities, and the development of blockchain applications and digital assets. However, given extreme volatility, our analysis suggests a 1% portfolio allocation to Bitcoin would require a 165% long-term annualized return. As such, while the high idiosyncratic risk may be appealing to risk-seeking traders such as hedge funds, they do not merit a strategic allocation in our view.

Source: Bloomberg, Goldman Sachs Investment Strategy Group, and Goldman Sachs Asset Management.

Did You Know?

Stats and Facts

1) Portfolio Construction, 2) Alt-Coins, 3) Regulatory Risk, 4) ESG, 5) CBDCs, and 6) Blockchain.

Source: Goldman Sachs Investment Strategy Group, Coinmetrics, Cambridge Center for Alternative Finance (CCAF), and Goldman Sachs Asset Management.


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