#114 – How to approach into this Macroeconomy?

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#114 – How to approach into this Macroeconomy?

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Macroeconomy – In this article you’ll find:

  • Macroeconomy – Approach to real assets
  • What the markets are pricing
  • Macroeconomy – Consumers currently are spending more of their incomes than usual
  • What is changed to the fixed income?

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In 2023, the focus may shift from rapidly rising inflation to slowing economic growth.

But while recession risk and geopolitical tensions should keep markets volatile, Goldman Sachs believes the new year is also likely to present opportunities.

Bond yields are finally offering attractive real income potential.

A Strategic Approach to Real Assets

Real assets, such as real estate and infrastructure, have historically offered unique attributes – relatively attractive yield and predictable growth, inflation-hedging benefits and lower volatility than broad equities.


But inflationary pressures could remain elevated in the medium term due to deglobalization trends, reshoring supply chains back to developed markets, higher commodity prices and a tighter labor market.

The inflationary environment encourages businesses to invest in innovative solutions to reduce costs and increase efficiency, in turn serving as a deflationary force, while companies offering innovative products also tend to exert considerable pricing power, making it easier for them to pass on higher input costs to customers.

Macroeconomy – Moving down in Cap

Small caps have historically performed well when inflation has been high and falling.

There have been 20 years since 1950 when starting inflation began above 3% and ended the year lower.

The median small cap return in these years was 21%. Relative to large-cap stocks, the median return was 5%.

In addition, small caps have historically outperformed following two consecutive quarters of GDP contraction, a common, though not universal, definition of recession, and in periods after the Federal Reserve (Fed) stops raising rates.

Market risk sentiment


Blackrock may turn more positive on stocks when the damage we see ahead is priced or our assessment of market risk sentiment shifts.

For now, the fading risks after this year’s positive developments are key to their strategic views.

Case in point: inflation.

They have always expected it to fall as pandemic drivers – like consumer spending’s shift from services to goods – reversed.

What’s key in their view of U.S. inflation landing closer to 3% than the Federal Reserve’s 2% target.

Markets aren’t pricing that in.

Plus, longer-term trends like aging demographics, geopolitical fragmentation and the energy transition mean inflationary pressures will be higher than in the past.

Treasury yields are falling further away from where Blackrock thinks they’ll climb to in the long term as investors demand more term premium, or compensation for the risk of holding them amid persistent inflation and heavy debt loads.

They don’t think nominal sovereign bonds can diversify portfolios anymore, and their preference for inflation-linked bonds is stronger given 2023 events.

Finally, Blackrock sees stock returns offering more compensation for risk than bonds.

Market backdrop

Global stocks paused from their rally this year and government bond yields steadied from their drop.

Surprisingly weak U.S. retail sales and industrial production revived concerns about recession.

Still, Federal Reserve and European Central Bank officials made the case for further rate hikes.

Always Blackrock thinks investors betting on Fed rate cuts later in the year are likely to be disappointed – even as a recession is foretold and they start to see more economic damage from their policy overtightening.

Strong Balance Sheets and Earnings – Macroeconomy


For equity markets, 2022 was mostly about valuations de-rating, particularly in growth equities.

The focus in 2023 is likely to shift to a lack of corporate earnings growth.

Goldman Sachs expects the low-growth environment to cause margin compression in most sectors, with energy a notable exception.

How much margins compress will depend on whether economies slip into recession – and if they do, how deep the recession turns out to be.

In these conditions, they think equity investors will want to favor exposure to profitable companies with strong balance sheets and earnings.

Opportunities may exist in highquality, defensive sectors that have typically held up well in similar conditions, including energy, consumer staples and healthcare.

For credit investors, they believe a focus on earnings stability, liquidity positions and key credit metrics such as net leverage and interest coverage, may be warranted in the current environment.

For equity investors, a binary approach to looking at either “growth” or “value”— the dominant prism through which investors viewed the markets in the cycle following the 2008 Global Financial Crisis (GFC)—in our view may no longer be the correct one.

Macroeconomy take

Blackrock expects a mild recession in the U.S. later this year as continuing rate hikes and the lagged effects of past hikes collide with consumers depleting their pandemic savings.

Many people built up extra savings in the pandemic when they stopped spending on things like restaurants and travel, and also received extra income from the government in the form of stimulus checks.


See the chart above.

As a result, U.S. consumers are currently spending more of their incomes than usual, saving just 2.4% of their total disposable income compared with a pre-pandemic average of 7.6%.

But those savings are running out – and if they keep being used up at the same rate, we estimate they will be close to depletion by the second half of this year.

If normal savings behavior then returns and the savings rate moves up closer to its pre-pandemic average, as they expect, consumer spending could start to contract by the end of the year.

Blackrock thinks that blow to GDP, plus rate hikes, will be enough to push the U.S. into recession.

Rethinking bonds

Fixed income finally offers “income” after yields surged globally.

This has boosted the allure of bonds after investors were starved for yield for years.

The case for investment-grade credit has brightened. They think it can hold up in a recession, with companies having fortified their balance sheets by refinancing debt at lower yields.

Agency mortgage-backed securities can also play a diversified income role. Short-term government debt also looks attractive at current yields.

In the old playbook, long-term government bonds would be part of the package as they historically have shielded portfolios from recession. Not this time, Blackrock thinks.

The negative correlation between stock and bond returns has already flipped, meaning they can both go down at the same time.

Why? Central banks are unlikely to come to the rescue with rapid rate cuts in recessions they engineered to bring down inflation to policy targets.

If anything, policy rates may stay higher for longer than the market is expecting.

Investors also will increasingly ask for more compensation to hold long-term government bonds – or term premium – amid high debt levels, rising supply and higher inflation.

Join the conversation with your own take on these topics in the comments below.

About the Author

Alessandro is a Financial Markets enthusiastic and he loves learning from articles/papers on many financial topics.

In doing so he shares with you the most interesting charts and comments.

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