Goldman Sachs said on Monday that it remains “broadly pro risk” in its asset allocation, ‘overweight’ equities and commodities, and ‘underweight’ bonds, but upgraded cash to ‘overweight’ and downgraded credit to ‘underweight’, both for three and 12 months.
“This reflects both a more challenging growth/inflation mix but also cash becoming more of a competitive asset class of its own with sharply rising front-end yields,” the bank said in a note. “And credit needs to rebuild risk premium in the face of reduced policy support and worsening demand technicals.”
GS said it continues to expect equities to outperform fixed income markets in 2022.
“Equities have digested the increase in global bond yields relatively well in aggregate but have been stuck in a ‘fat and flat’ range. There has been some indigestion due to the speed of the bond yield increases with the sharp hawkish pivots from global central banks. And there has been a material rotation from growth to value stocks, similar to Q1 2021.
“Longer duration regional markets like the US have underperformed shorter duration ones like Europe, especially the UK. We expect those trends to extend further and generally prefer non-US to US equity markets in 2022 (versus benchmark) – both for 3m and 12m horizons. We would also aim for more diversification across value and growth styles to actively reduce equity duration risk.”
As far as credit is concerned, Goldman pointed to little total return potential as it expects a gradual drift higher in spreads and a drag from higher yields.