While investors are facing a period of heightened uncertainty after a tumultuous 2022, the Investment Strategy Group (Asset & Wealth Management at Goldman Sachs) believe that their two primary investment themes remain valid: Staying Invested and US Preeminence.
Staying invested in such an uncertain environment is ISG’s recommended course of action for their clients. The framework for staying invested is best captured by the exhibit below. If the equity market has already discounted a recession, history has repeatedly shown that investors are better off staying the course given forward returns have typically been attractive. During past equity drawdowns, it has taken 10 months on average for moderate-risk portfolios to recover. The risk of missing out on an increase in equities is far greater than a short-term mark-to-market risk that will eventually dissipate. It is worth noting that the recommendation for clients to stay invested would change if ISG develops high conviction that a recession is imminent and not already discounted by the market. Currently, ISG does not have high conviction that a recession is imminent and one has already been partially discounted by the equity market decline.
ISG’s recommendation to stay invested is also driven by the general upward trend of US equities. Historically, US equities have been driven by earnings in the US economy, which are upward-trending except for recessions. Downdrafts pass and portfolios recover. US equities, in fact, have historically been the most effective hedge against inflation relative to other asset classes. This asset class has had the highest frequency of outperforming inflation over any period between one and 20 years. US Preeminence drives an overweight to US assets in ISG’s strategic asset allocation process. Their analysis shows that the US ranks highly compared to other regions across most metrics that underpin economic growth, earnings growth and greater resilience.
ISG expects global economic growth to slow to below-trend levels, with the US having modest growth; the Eurozone, UK and Russia in recession; and Japan an exception with above-trend growth. ISG expects large emerging market countries will grow below trend at mid-single-digit growth levels. For China's post-COVID recovery, ISG estimates growth will reach 4.9%, just above trend levels of 4-4.5%.
Monetary Policy Tightening
ISG believes that most major central banks will continue tightening monetary policy but at a more modest pace than in 2022. China is expected to be a key exception, as leadership tries to stem declines in the property sector.
Significant Geopolitical Risks
There is a much longer litany of geopolitical risks foreseen in 2023 than in 2022. These risks include an escalation of the Russia-Ukraine war, high US-China tensions, more ballistic missile testing by North Korea, a growing partnership between Iran and Russia, continued nuclear enrichment in Iran and debt ceiling negotiations in the US.
Recession Risk in the US
ISG has assigned a 45-55% range to the risk of recession in 2023. ISG believes the fog of uncertainty is too great to have much conviction on the direction of the US economy, and therefore recommends investors position their portfolios neither for the certainty of recession nor for the certainty of modest growth in the US.
Strategic Asset Allocation in the Face of Uncertainty
ISG continues to recommend appropriate, customized diversification for client portfolios. A mixture of stocks and bonds is an effective starting point for a portfolio, with nearly a hundred years of data demonstrating that the 60/40 portfolio has generated positive returns 80% of the time on a rolling 12-month basis.
Attractive High-Single-Digit Portfolio Returns
ISG expects high-single-digit returns on a well-diversified moderate-risk portfolio. The returns are driven by equity returns of over 10% in developed markets and 9% in emerging markets. ISG expects mid-single-digit returns in fixed income assets.
For more of ISG’s view on the global economic and financial markets, read their 2023 Outlook, Caution: Heavy Fog.
If the Outlook sparks any questions about your personal situation, connect with your Goldman Sachs advisor. Don’t have a Goldman Sachs advisor? Contact us.
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