(Bloomberg) -- Goldman Sachs Asset Management is recommending investors keep the faith in stocks.
Equities offer the best opportunity to outperform inflation, the firm said in an Investment Ideas 2022 report. Cyclical stocks — like financials, energy and resources companies — are especially well-suited to benefit from rising prices, it said. These firms typically excel when the economy is doing well, or recovering from a crisis.
With inflation in the U.S. at the highest in almost 40 years, investors are reevaluating their strategies for generating returns. After two years during which almost everything from stocks to cryptocurrencies and real estate surged, the prospect of rate hikes from the Federal Reserve is rattling stocks and sparking a hunt for new opportunities.
Goldman also favors equities in sectors like real estate and infrastructure, since the value of leases and contracts often rises when inflation increases. Instead of putting cash in index products, which typically cost less, the company recommends buying into funds that have an active manager.
“Managers who can tilt toward companies that are somewhat shielded from rising prices or likely to benefit from them, such as energy producers or firms with low labor costs or resilient supply chains, may be able to generate higher returns relative to strategies that track a benchmark,” the firm said in the report.
Equities in Europe, Japan and emerging markets could be good bets, since they’re currently cheap when compared to their earnings growth potential, according to Goldman. That’s a change from past performance — the S&P 500 rose 27% in 2021, compared with a 22% gain for the MSCI Europe Index and a 5% loss for the MSCI Emerging Markets Index.
This year, rich valuations for U.S. equities mean the gains could be more modest, Goldman said. Emerging markets companies also typically have more exposure to commodities, which can help protect against inflation.
Companies in China also remain attractive, Goldman said, despite a government crackdown in the past year that’s halted growth. Commitments to reduce carbon emissions as well as innovations in the tech and health care sectors are positives 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 U.S. as the world’s largest economy by 2030.”
To contact the author of this story:
Claire Ballentine in New York at [email protected]