Dear Investors,
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.