Goldman Sachs reveals how to trade the 'troubling triad' hitting markets right now

Published Tue, May 17 20227:37 PM EDT

Goldman Sachs ' Asia strategists say markets are facing a "troubling triad" of rising rates, recession risk and dollar strength — but they expect some stocks to benefit. Here are some of their buy-rated picks, a number of which are on Goldman's conviction list. "Asian regional markets are off to one of the worst starts in 30 years," Goldman's strategists, led by Timothy Moe, said on May. 11. The MSCI Asia-Pacific ex Japan Index is down over 16% this year, with five consecutive months of declines. "The only previous years when the first 5 months' cumulative decline approached this were -14% in 2020 (Covid outbreak), -17% in 2000 (tech bubble burst), -12% in 1998 (Asian Financial Crisis) and -11% in 1994 (FOMC rate hike shock)," the analysts added. The combination of rising interest rates, recession concerns in the U.S. and rising U.S. dollar strength is driving the weakness, Moe added. Read more These low-volatility funds offer stability when the Dow swings by 1,000 points Stocks could build on Fed rally, but volatility is not going away Goldman said the near-term outlook "remains challenging" given these external pressures, as well as domestic headwinds such as slowing growth in China. While the bank has trimmed its forecasts for the MSCI Asia-Pacific ex Japan Index given its expectations for continued near-term volatility, it still sees potential upside of 17% over the next 12 months, driven by forward earnings growth and moderate valuation recovery. Bank stock picks Goldman favors themes that can "deliver alpha returns in a more beta-challenged context." "These include earnings delivery (positive EPS [earnings-per-share] revisions, margin winners), rate-rise beneficiaries (Buy-rated banks), commodity supercycle (commodity cyclicals vs. global cyclicals) and cash return (secure high dividend yield)," the bank said. Alpha and beta are risk ratios used by investors to determine whether their investments are doing well. Alpha is a measure of an investment's return, while beta gauges the volatility of a security. On banks, Goldman noted that "banks tended to outperform due to their fundamental exposure (better NIM and investment portfolio yields) and historical positive price relationship with higher rates." Goldman's buy-rated picks include National Australia Bank , State Bank of India , Bank Rakyat Indonesia , BOC Hong Kong and South Korea's KB Financial . All are on Goldman's conviction list — its analysts' top picks across the bank's coverage. Other stocks on Goldman's buy-rated banks list include Singapore's DBS Group , HSBC , Standard Chartered and Indonesia's Bank Central Asia .

The Federal Reserve building in Washington, January 26, 2022.

Joshua Roberts | Reuters