(Bloomberg) — Goldman Sachs Asset Management is advising investors to maintain confidence in the stock.
The firm said in its Investment Ideas 2022 report that equities provide the best opportunity to beat inflation. Cyclical stocks such as financial, energy and resources companies are particularly apt to benefit from rising prices, it said. These firms generally excel when the economy is doing well, or recovering from a crisis.
With inflation in the US at its highest level in nearly 40 years, investors are re-evaluating their strategies to generate returns. Over the course of two years in which almost everything from stocks to cryptocurrencies and real estate has risen, the prospect of a rate hike from the Federal Reserve has left stocks scrambling and seeking new opportunities.
Goldman also favors equities in sectors such as real estate and infrastructure, as the value of leases and contracts often rises when inflation rises. Rather than pouring cash into index products, which typically cost less, the company recommends buying into funds that have an active manager.
“Managers may lean toward companies that are somewhat protected from rising prices or likely to benefit from them, such as energy producers or firms with low labor costs or flexible supply chains, relative to strategies that track benchmarks. may be able to generate higher returns,” the firm said in the report.
According to Goldman, equities in Europe, Japan and emerging markets can be good bets, as they are currently cheap compared to their earnings growth potential. This is a change from past performance – the S&P 500 gained 27% in 2021, compared with a 22% gain for the MSCI Europe Index and a 5% loss for the MSCI Emerging Markets Index.
Goldman said the rich valuation for US equities this year means gains could be more modest. Emerging market companies generally have greater exposure to commodities, which can help protect against inflation.
Companies in China also remain attractive, Goldman said, despite government action over the past year that has stalled growth. Innovations in technology and healthcare sectors along with reducing carbon emissions are positive for the country’s market.
“China’s growth potential could make it too large and too important to ignore,” Goldman said in the report. “Yet when it comes to capital allocation, not many people turn to China, which is expected to overtake the US as the world’s largest economy by 2030.”
To contact the author of this story:
Claire Ballantine at New York [email protected]