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MARKET KNOW-HOW 
|
2022: Edition 1

MARKET KNOW-HOW | 2022: Edition 1

Supply Change


Market-Know-How: T1 2022 - Supply Change

In 2022, we expect a year not of empty shelves, but of wholesale changes to the composition of macroeconomic and market drivers. In other words, the supply of key components such as monetary policy, inflation, returns, and alpha is set to transition in the new cycle. We expect:

  • Extreme injections of monetary liquidity and fiscal support to become a more challenging mixture of tighter policy and fiscal drag, particularly in the US.
  • Globalization’s multi-decade containment of inflation to erode as shelter, wage, and environmental constraints raise inflationary baselines.
  • High equity returns—previously fueled by declining interest rates, rising profits, and multiple expansion—to moderate in line with earnings growth.
  • Alpha opportunities to migrate from major factor tilts to more idiosyncratic outcomes dictated by innovation and disruption.

 

In our view, these supply changes may result in temporary imbalances and volatility but are essential in the transition to
a more healthy and sustainable expansion.

In this edition of the Market Know-How, we explore how investors may best respond, with emphasis on:

  • Expanding a portfolio’s geographic footprint to improve company-specific access to post-COVID-19 trends and cyclical recovery.
  • Implementing non-traditional investments to amplify selective positioning, diversify return streams, and manage episodic volatility.
  • Active positioning and nimbleness with the recognition that disruptive innovation is accelerating and company lifespans are collapsing under the force of change.
  • Investing as a steward of both capital and the environment to be on the winning side of broader economic and societal transitions.

Macro & Market Views


Global Growth

We expect that global growth will normalize towards trend and that inflation surges will recede by late 2022 or early 2023. Still, inflation should sufficiently justify the beginnings of monetary normalization and reduced fiscal support. Central bank transparency will be essential amid a mix of sticky inflation, supply chain dislocations, and decelerating growth. To be sure, other macro underpinnings are stable, including a well-liquefied banking system, robust private sector balances, and relatively limited financial risks.

Source: Goldman Sachs Global Investment Research and Goldman Sachs Asset Management.
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Outlook
Megatrends: Transition, Transformation, Transmission

Accelerating Pace of Adoption and Disruption

New innovation has continued to accelerate economic transformation and technological dissemination. Rising real income, broader information access, and globalization have steepened adoption timelines from multi-decade periods to just half of a decade in this latest revolution. We think this momentum can continue to build, with incumbents both further disrupting markets and also giving rise to synergies among new creators. This incumbent-creator dynamic may bring about transformative second-wave technologies that ultimately reshape mature industries and business models.


Source: Comin, Hobijn and others, Our World in Data, and Goldman Sachs Asset Management.


Solutions

Breadth and Depth of New Innovations

Information technology, health care, and consumer-focused sectors stand to benefit most from this tech penetration. In our view, tech innovation will expand beyond FAAMG companies, allowing smaller institutions and traditionally non-tech companies to compete for market dominance. We see tech broadening health care reach, as access to professionals and services move online. Likewise, expanding tech may benefit both physical and digital consumerism, as the sharing economy deepens across everyday living and the creator economy grows. While leaning into tech innovation may be intuitive, we think the speed and depth of its application will allow for many selective global opportunities.


Source: Goldman Sachs Asset Management.

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Outlook
Developed Markets Ex-US: A Developing Case

Not the Indices of Old

We believe structural and fundamental improvements will provide tailwinds for developed markets. Japan and Europe’s respective shifts to more stable and higher growth sectors, while remaining at discounted valuations relative to the US, pave the way for future equity market appreciation.


Source: Bloomberg and Goldman Sachs Asset Management.


Solutions

Shrinking EPS Growth Differentials

Meanwhile, the era of US earnings dominance seems to be narrowing. In 2022 alone, we forecast EPS growth for TOPIX and STOXX 600 at 7% and 6%, respectively, catching up to 8% for the S&P 500. This continued earnings momentum sets the stage for compelling returns, regardless of multiple expansion. As leadership goes global, we believe in a stronger case for developed markets outside the US.


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

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Outlook
Emerging Markets: Macro and Micro

Supportive Macro Tailwinds

EM is well-positioned for the global recovery in our view. On the macro front, the EM-DM growth differential should accelerate as DM GDP reverts to trend. Coupled with potentially higher US rates and a weaker US dollar, these factors have historically been tailwinds for EM equities.


Source: Bloomberg and Goldman Sachs Asset Management.


Solutions

EM is Home to Some of the Best Performing Companies

Beyond beta, the alpha opportunity is strong. The majority of the best performing companies in the world have come from EM in 7 out of the past 10 years. Strong active managers who have been able to identify these stocks have outperformed by a wide margin, while bottom quartile managers underperformed marginally. In our view, the optimal exposure to EM is long-term and bottom-up.


Source: Bloomberg and Goldman Sachs Asset Management.

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Outlook
Volatility: More Turbulent Episodes

A Bumpy Transition

Waning policy support, normalizing growth, rising rates, and high valuations may turn the “secular bull” into a “fat and flat” market, featuring lower returns and higher volatility in the long-term.


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


Solutions

Sticking Through It

Still, we advocate sticking through this more turbulent market regime. History shows that while a 5-10% drawdown happens every ~13 months in a “fat and flat” market, investors recover 100%+ of the pullback within 6 months. In order to smooth the ride, we believe investors should address volatility by pivoting portfolios toward income solutions, alternatives, active security selection, and tax management.


Source: Bloomberg and Goldman Sachs Asset Management.

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Outlook
Municipal Bonds: Muni Musings

Sustainable Technical Backdrop

The search-for-yield environment and a significant revenue rebound at the state and local level have driven a rise in demand for municipal bonds. Cumulative municipal bond flows have increased ~76% from 2017-2020 while the growth of total outstanding muni bonds has remained relatively flat. Notably, with both a US tax hike and greater infrastructure investment potentially on the horizon, the municipal complex may see yet another demand tailwind, especially as tax-efficient strategies become a bigger priority. For investors looking to access the asset class, we believe the vehicle of choice rests on investors’ expectations for the role of munis in portfolios.


Source: SIFMA, Morningstar, and Goldman Sachs Asset Management.


Solutions

Muni Mapping

Key muni investment characteristics across implementation vehicles:

  • Traditional SMAs are customizable to fit client income and tax guidelines, provide holdings transparency, and target capital preservation.
  • Hybrid SMAs offer customization, access to hard-to-obtain credit via a pooled vehicle, and high income potential at reasonable cost.
  • Mutual Funds offer liquidity, yield maximization, and diversification across the full breadth of market opportunity via active selection.
  • ETFs offer high diversification across the credit spectrum to capture market beta exposure at a lower cost.


Source: Goldman Sachs Asset Management.

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Outlook
Climate Risk: Don’t Fight the Future

Costly Weather Disasters

The physical effects of climate change, such as rising sea levels and more severe weather, as well as the potential transition to a net-zero carbon economy through changes in government climate policy, technology and consumer preferences, may result in financial and policy risks with economic consequences.


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


Solutions

Investments in Infrastructure

In aggregate, we estimate global investment opportunity in green infrastructure alone of $56 trillion in order to achieve global net zero by 2050. Climate risk is both an investment risk and opportunity, in our view, and the narrowing window for governments and economies to reach net zero means that it is important for investors to consider adapting their portfolios today.


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

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Stay Informed and Be Ahead of the Curve


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