(Bloomberg) – Goldman Sachs Asset Management advises investors to remain confident in stocks.
Equities offer the best opportunity to outperform inflation, the company said in a Investment Ideas Report 2022. Cyclical stocks such as financials, energy and resource companies are particularly well suited to benefit from rising prices, he said. These companies generally excel when the economy is doing well or recovering from a crisis.
With US inflation at its highest in nearly 40 years, investors have been reassessing their strategies for generating returns. After two years in which nearly everything from stocks to cryptocurrencies and real estate have surged, the prospect of Federal Reserve rate hikes is rocking stocks and sparking a hunt for new opportunities.
Goldman also favors stocks in sectors like real estate and infrastructure, as the value of leases and contracts often rises when inflation rises. Instead of putting money into index products, which usually cost less, the company recommends buying into funds that have an active manager.
Managers who may gravitate towards companies that are somewhat insulated from, or stand to benefit from, rising prices, such as energy producers or companies with low labor costs or resilient supply chains, may be able to generate higher returns compared to strategies that track a benchmark, the firm said in the report.
Stocks in Europe, Japan and emerging markets could be good bets, as they are currently cheap relative to their earnings growth potential, according to Goldman. This is a change from past performance, the S&P 500 rose 27% in 2021, compared to a 22% gain for the MSCI Europe Index and a 5% loss for the MSCI Emerging Markets Index.
This year, high valuations for U.S. stocks mean gains could be more modest, Goldman said. Emerging market companies are also generally more exposed to commodities, which can help protect against inflation.
Businesses in China also remain attractive, Goldman said, despite a government crackdown over the past year that has halted growth. Commitments to reduce carbon emissions as well as innovations in the technology and healthcare sectors are positive for the country’s market.
China’s growth potential may make it too big and too important to ignore, Goldman said in the report. Yet when it comes to capital allocation, many remain underexposed to China, which is expected to overtake the United States as the world’s largest economy by 2030.
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Claire Ballentine in New York at [email protected]
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