In 2023, investors will have to face a market full of uncertainties. PHOTO CREDIT: MICHAEL M. SANTIAGO—GETTY IMAGES
During times of uncertainty, our conversations with clients focus on macroeconomic and geopolitical headwinds and their likely impact on investment portfolios.
The current basic judgment is still that the U.S. economy will not experience a recession next year. Even a recession should be relatively benign due to strong U.S. fundamentals.
In the near future, the market is most worried about US inflation and future interest rate trends, but international factors such as the conflict between Russia and Ukraine have also weighed on investor sentiment.
However, our in-depth analysis of the stock market in 1945 found that historical experience shows that periods of market volatility are the most suitable for investors to continue investing.
Many clients have taken a more defensive approach to their portfolios in order to better manage the challenges they face late in the macro cycle.
Current valuations have been substantially revised, especially for growth-stage technology companies, but there are concerns that duration-sensitive stocks could suffer further losses as terminal interest rates approach 15-year highs.
Before the economic downturn this year, if investors had more allocations to growth stocks, they could adopt a tax-turned-win strategy for investment losses, that is, realize losses to offset other gains, so as to maximize the value of negative returns.
Investors who choose to retain or cautiously build exposure to growth stocks are generally more defensive, adopting some strategy to limit the risk of further market declines. Many investors also peg such exposure to higher-than-normal cash.
We believe investors should “stay the course,” prudently maintaining equity exposure, for two main reasons:
• Since the global financial crisis in 2008, the market’s broad rebound has often resulted in huge gains, leading to huge tax liabilities when selling stocks.
• Notoriously difficult to capitalize on re-entry opportunities, often “missing” the pace of stock advances. The median stock gain of more than 23% in the year following a bear market.
Therefore, we recommend that investors avoid large adjustments in equity allocation and instead choose high-quality companies that fit the investment theme (leading US position, strong dollar and healthy balance sheet).
Investors should pay attention to solid and stable profits, coupled with long-term cash flow, especially early-stage companies that are predicted to have limited profitability.
The U.S. dollar’s strength is underpinned by the Federal Reserve’s ongoing cycle of rate hikes, and investors should be cautious about investing in companies that generate the majority of their revenues abroad because they could take losses from currency exchange rates when accounting for earnings.
Geographically, we still believe the US will outperform other developed or emerging economies. There are long-term structural factors behind it, such as higher labor productivity, faster earnings per share growth, favorable demographics, and stronger innovation capabilities.
Following the sharp rise in interest rates this year, we have seen renewed investor interest in cash management and short-term fixed income products. Execution strategies range from simple overnight and term deposits to short-term corporate and managed municipal bond portfolios. Since most of the firm’s clients are taxed, the tax advantage of the muni strategy can enhance returns.
If clients are looking for more duration exposure, they may consider choosing opportunities in corporate investment grade products. We are cautious about the downside risk of high-yield bonds in a recession scenario, but from a fundamental point of view, 2023 is still expected to maintain positive returns.
Overall, our view is that market volatility can create good investment opportunities in case a recession does occur in 2023. The odds of a recession have jumped from 20-25% earlier this year to 50-50 by our estimates.
2022 is clearly a challenging year, but it’s important to frame this year’s volatility from a long-term perspective. Since the post-global financial crisis lows of March 2009, U.S. stock market investors have earned more than 675% on the S&P 500, according to our analysis of Bloomberg data. Despite the turmoil this year, the overall performance is still good, and there is room for growth.
Investors are better off sticking with their investments, weathering the tough times, and waiting for the good times to hit the jackpot.
Sarah Nathan-Talahano is Global Head of Private Wealth Management Capital Markets and Goldman Sachs Apex Family Office.
Opinions expressed in review articles on Fortune.com are solely those of the author and do not represent the views and positions of Fortune. (Fortune Chinese website)
Translator: Liang Yu
Reviewer: Xia Lin
Investors will have to navigate uncertain markets in 2023.
MICHAEL M. SANTIAGO—GETTY IMAGES
In these uncertain times, the conversations we are having with our clients most often focus on macroeconomic and geopolitical headwinds and likely portfolio impacts.
Our base case remains that the US economy will avoid a recession next year. Even if a recession were to take place, it should be relatively mild given robust underlying US fundamentals.
While domestic inflation and the forward path of interest rates continue to be the most obvious near-term concerns, international factors such as the Russia-Ukraine conflict and China’s ongoing regional assertiveness are also weighing on investor sentiment.
However, based on our analysis of equity market conditions going back to 1945, history suggests that during periods of market volatility, investors are best placed to stay the course and remain invested.
Many clients have applied a defensive value-oriented tilt to their portfolios to better withstand the challenging late-cycle macroeconomic headwinds which investors currently face.
While valuations have substantially reset, particularly in growth-stage technology companies, there is an apprehension that duration-sensitive stocks could suffer further losses with terminal interest rates nearing their highest levels in 15 years.
Investors who were over-indexed to growth equity ahead of this year’s downturn have been able to use negative returns through tax-loss harvesting strategies that monetize losses to offset other gains.
Conversely, investors choosing to retain or cautiously build exposure to growth equity names are mostly doing so in a more defensive way by using strategies that limit downside risk should markets slide further. Many are also coupling this equity exposure with larger-than-normal cash .
Our conviction that investors should “stay the course” and cautiously maintain equity exposure is driven by two principal factors:
• Gains achieved in the broad market rally since the 2008 Global Financial Crisis are often substantial, leading to large tax liabilities when stocks are sold.
• Timing when to re-enter the market is notoriously difficult and often entails “missing out” on meaningful equity upside. The median equity gain in the year following past bear markets is more than 23%.
Instead, we advise that investors should avoid substantial equity allocation shifts and lean towards quality companies that fit with our key investing themes: US preeminence, dollar strength, and healthy balance sheets.
Investors should focus on robust and stable margin profiles, coupled with durable, long-term cashflow generation, especially over earlier-stage companies with limited foresight to profitability.
With the Fed’s ongoing hiking cycle underpinning dollar strength, investors should exercise caution when investing in companies that source a large proportion of their revenues from abroad, creating possible currency exchange disadvantages when reporting earnings.
Geographically, we continue to believe that the US will fare better than other developed or emerging economies. This is underpinned by long-term structural factors such as higher labor productivity, greater EPS growth, favorable demographics, and greater innovation.
After this year’s sharp rise in interest rates, we have seen renewed investor interest in cash management and short-duration fixed income. Implementation strategies range from simple overnight and term deposits to short-duration corporate bonds and our managed municipal bond portfolios of molipos. clients are taxable investors, municipal band strategies also have tax-advantaged yield enhancement characteristics.
Clients looking for more duration exposure should consider selective opportunities in the corporate investment-grade space. And while we are cautious about downside risks to high-yield bonds in a recession scenario, our base case still implies positive returns for 2023.
On balance, our view is that market volatility can create interesting investment opportunities against the real possibility of a recession in 2023– a probability that jumped from 20-25% earlier this year to more even odds today, according to our estimates.
While 2022 has clearly been a challenging year, it is important to frame this year’s volatility in a longer-term context. Since the post-GFC lows in March 2009, US equity investors have enjoyed a more than 675% return in the S&P 500, According to our analysis of Bloomberg data. Despite this year’s turbulence, that is a remarkable run that has moderate room for further upside.
Investors are better off staying in and riding out the tough days to reap the benefit of the good ones.
Sara Naison-Tarajano is global head of private wealth management capital markets and Goldman Sachs Apex Family Office.
The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.
This article is reproduced from: https://www.fortunechina.com/shangye/c/2022-12/18/content_424736.htm
This site is only for collection, and the copyright belongs to the original author.