Goldman Sachs Investment Strategy Group Head of Tactical Asset Allocation Brett Nelson joins Yahoo Finance Live to recommend investors stick with U.S. equities in 2022, while discussing volatility and global interest rates.
AKIKO FUJITA: Goldman Sachs Investment Strategy Group is doubling down on US equities. After a banner year in 2021 with the S&P 500 gaining 27%, their latest outlook report is calling on clients to remain invested despite high valuations. Let's bring in Brett Nelson, Goldman Sachs Investment Strategy Group head of tactical asset allocation.
Brett, walk me through that thesis. I mean, I guess the question is if you don't stay in equities where else do you go? But what are you advising clients right now, especially in the face of volatility?
BRETT NELSON: Sure, so the general recommendation, which we've actually been making since the trough of the financial crisis, we point out in the report that we've told clients to stay invested in US equities 106 times since the trough of the financial crisis, and this report makes 107. So we certainly realize the recommendation is long in the tooth but we've underwritten the thesis again this year. And it really comes down to a couple of factors.
So the first is that when the economy is expanding as it is now, and in fact, we're expecting above-trend growth, the odds of a positive return in US equities historically over any one year holding period have been about 88% historically. And the skew of those returns is very favorable, there's a significantly greater chance of a 10% or greater gain in equities versus a 10% or greater loss. So given the economic backdrop with us putting just 10% odds on a recession this year, we think that those odds continue to work in investors' favor.
The second thing we would point out is along the lines of what you just highlighted, the kind of TINA narrative, there is no alternative. In that when we think about the returns on cash and bonds, they're flat to negative this year, and our return for equities is around 6%, depending on other markets outside the US it could be as high as 9%. But nonetheless, that additional risk premium that you're earning in equities if we think about that relative to historical standards is still attractive even adjusting for the volatility. And so that's really the underpinning of our recommendation for clients to stay invested.
BRAD SMITH: Within the sector opportunities that you're looking into right now and kind of forecasting as we move on throughout the rest of the year, where are those sectors that are perhaps best positioned for outperformance?
BRETT NELSON: Yeah, so tactically we have held this position last year and we're again recommending it this year, in that we have an overweight to value versus growth. And there are a couple of factors that underpin that recommendation. So we know that in the last few years, there's been a scarcity of growth, you know, the last economic expansion was only around 2% annualized real GDP growth each year, which was very low by historical standards. So in that type of environment investors were willing to pay a premium for growth stocks or stocks that could generate growth organically.
We also know that we have had very low interest rates in the past several years. And as a result of that, the longer duration cash flows of those growth and technology stocks have become more valuable because they are being discounted at a lower rate. We think that now that rates have bottomed and have started to rise, and we've certainly seen a big backup in interest rates this year, as well as the fact that we expect another year of above-trend growth, both of those factors work against the historical preference for growth stocks, and that's why in our view we're starting to see growth stocks struggle late last year and early this year already.
So specifically, how are we expressing that? Well, we have an overweight to energy companies, S&P 500 energy firms, as well as MLPs or master limited partnerships, as well as just an outright long in oil itself through an options structure. And then we also have an overweight in the Eurozone banks.
AKIKO FUJITA: Talk to me about the eurozone banks specifically. I mean, is this sort of the same idea that we're looking at here in the US as we see the Fed start its tightening and you know, hike its rates, if you look at something like the ECB, I mean, they've taken more of a patient stance as opposed to the Fed.
BRETT NELSON: Yeah, so there's certainly an interest rate component to that, so we think that these stocks will be natural beneficiaries of just a rise in global interest rates. Even with the ECB being more patient, we still know that German 10-year bund yields are rising for example. And the other dynamic is that these stocks are just fundamentally cheap, when we look at their price to book ratio relative to their profitability, they still screen as one of the most attractively priced sectors within the eurozone. And we also think that investors might not fully appreciate just how much they've right-sized their balance sheets and improved their capital ratios.
And the reason that's important is because that puts them in a position to return capital, especially now that the dividend band has been listed-- lifted. And so we think that these stocks you know, have dividend yields 4% or 5%, which looks very attractive as well as buyback potential. And so all of those factors in our view conspire to provide an attractive return for investors this year.
BRAD SMITH: You got to walk us through the latest acronym in the evolution of different FAANG names that we've seen over the years. Now we have FANGMANT, so F-A-N-G-M-A-N-T. So break this down for us, and why we're now evolving once again what has been a very popular kind of host of companies over these past several years in terms of growth acceleration that we've watched.
BRETT NELSON: Yeah, so it's certainly been an alphabet soup in the last several years. The FANGMANT is Facebook or Meta, Apple, Netflix, Google, Microsoft, Amazon, Nvidia, and Tesla. And so the reason we broadened it out is because we recognize that even when you're looking at the top five stocks within the S&P 500, these don't necessarily capture all of these names, which are obviously very big market cap weights in the market. And so our thought was to simply broaden it out to the universe of stocks that get the most attention in terms of what retail investors are trafficking in, especially through options, and what tends to be top of mind when people think about big large technology companies in the US.
But one of the main points that we make in the report is that we don't necessarily need the FANGMANT stocks to generate a positive return for our forecast for this year for 6% returns in the S&P 500 to come to fruition. And in fact, if the other stocks in the S&P were to be up around 10%, then we think that we could still achieve that even if-- our objective, our 6% objective-- even if the rest of the FANGMANT stocks were down 5%. So the point is that we think that the kind of bifurcated market that we're seeing this year, where we have energy and financials up on the year, and technology stocks obviously down, that trend could continue and could still allow the S&P 500 to generate positive returns this year, which is our expectation.
AKIKO FUJITA: Something tells me FANGMANT is not going to take off like FAANG, but point taken. Some good insight there, Brett. It's good to talk to you today. Brett Nelson, Goldman Sachs Investment Strategy Group head of tactical asset allocation.