Preface

As geopolitical tensions and the potential reinstatement of Trump tariffs loom large, tail risks in the financial markets are becoming increasingly prominent. In light of these concerns, Goldman Sachs advises maintaining a moderately risk-oriented stance within asset allocations while striving for balance across diverse investment portfolios. The focus should be on reducing exposure to U.S. equities due to their high concentration and valuation, and instead allocating more to Japanese and other Asian stocks, short-term government bonds, and U.S. dollars. Crucially, gold continues to be highlighted as the premier hedge against financial instability.

Lazy bag

Goldman Sachs advises moderation in risk allocation amidst geopolitical uncertainties, reducing U.S. stocks in portfolios, and instead focusing on Asian equities, short-term bonds, and the U.S. dollar. Gold remains the top hedge against economic shifts.

The economic landscape following the strides of 2023 into 2024 is marked by distinct trends across asset classes. Notably, while prominent U.S. tech stocks and European banks gained traction, and Bitcoin surged upon Trump's re-entry to the U.S. political scene, performance lacked on the NASDAQ front. Conversely, precious metals like gold have outperformed, hinting at their continued appeal as a stable investment. Japanese government bonds, the yen, and long-term U.S. Treasuries lagged behind, while growth stocks again eclipsed value stocks. As 2025 approaches, Goldman Sachs anticipates global economic growth stabilization and further declines in inflation, aligning with an extended period of accommodative monetary policies. However, with less tailwind from inflation alleviation, the valuations of risky assets remain elevated. U.S. political turbulence post-election, alongside heightened geopolitical and 're-inflation' risks, further raise tail risks. Trump's tariff policies, previously cited by Goldman as potential game-changers, continue to hold significant global market implications.

Against this macroeconomic backdrop, Goldman emphasizes the importance of maintaining a balanced asset allocation. Their strategist team, headed by Christian Mueller-Glissmann, underscores the necessity for equilibrium between equities and safety assets to brace against next year's tail risks. While historical valuation levels suggest high returns, potential longer-term yields might diminish, prompting a recommendation for rebalancing portfolio weights to Asian stocks and alternative assets like short-term bonds and gold.

In 2025, the investment narrative centers on ‘balancing to overcome tail risks.’ Goldman envisions asset allocation in a moderate risk preference context, despite reduced macroeconomic tailwinds. Their strategic advice suggests seeking diversification through bond investments to buffer potential economic impacts once inflation pressures intensify, affecting traditional stock-bond correlations. High valuations now necessitate a nuanced approach, balancing short-duration bonds and indexes like TIPS against equity positions in light of persistent fiscal and geopolitical uncertainties.

The bank's strategic outlook lays out five pivotal options strategies: put spreads on stocks and Credit Default Swaps (CDS) for risk calibration, a mixed strategy of S&P 500/Euro/USD for reinflation setbacks, and combinations of gold and dollar call options to hedge geopolitical tensions. Protective puts on Asian emerging markets further bolster against tariff-induced risks, with bespoke hedges targeting European and Asian emerging-market equities.

Goldman posits 2025 as the year of Alpha, driven by exceptional market concentration. Despite tech bubble-like valuations, supportive macro conditions anticipate an upswing in the S&P 500 Index, backed by robust GDP growth, sustained major investment in technology, and reduced corporate tax burdens, predicting an 11% return. The Risk Appetite Indicator underscores persistent bullish sentiment but suggests vulnerabilities to negative growth and interest rate shocks. Consequently, Goldman suggests moderate overexposure to U.S. and Japanese equities while maintaining neutrality in European markets, driven by favorable earnings growth and solid corporate balance sheets.

Global equities are projected to provide a 9% price return and an 11% total return predominantly from earnings expansion rather than valuation gains. European STOXX 600 is forecasted at a modest 3% return, constrained by sluggish economic activity, tariff influences, and commodity price variances.

Foreseeing further interest rate cuts and steeper yield curves, Goldman remains bullish on government bonds, advocating short-term maturities to optimize hedging strategies. Credit markets, though attractive on yield terms, face valuation concerns warranting a cautious approach. Default rates in high-yield bonds are expected to inch upwards marginally by 2025's end.

In commodities, while holding a neutral stance, Goldman favors strategic selectivity and tail-risk hedging, forecasting an 8% total return on the GSCI, with oil prices within a $70-85 range but subject to upward risks due to supply constraints.

Gold’s bullish outlook is stark, with an anticipated price peak of $3000 per ounce by the end of 2025, validated by central bank demand and anticipated Fed rate cuts. In base metals, copper, and aluminum are preferred over iron ore due to an evolving landscape driven by Asian green energy initiatives.

Finally, on the currency front, a prolonged strong dollar environment is anticipated, buoyed by the current U.S. administration's fiscal and tariff policies, maintaining global economic prominence despite potential fluctuations from other currencies.