Housing Market Can Shield Investors in Recession: Goldman Sachs Chief – Business Insider

The World Bank projects much of the world will slide into a recession in 2022 through to 2023 as inflation stays high.
While Goldman Sachs indeed expects the US economy to slow to below-trend growth in the second half, its base case is still a soft landing even though recession risks remain elevated as the Fed continues its tightening cycle.
Part of the reason for the cautious optimism is a continued strong labor market, in combination with the bank’s view on the US housing market, Christian Mueller-Glissmann, head of asset allocation research at Goldman Sachs, told Insider.
“What’s quite remarkable in the US is that you’ve had a large increase in house prices and if you get higher mortgage rates, that eventually will likely weigh on house prices,” he said.
But due to US mortgage lengths being around 30 years, Mueller-Glissmann believes the effect on pricing should be delayed. Also there is an extreme supply-demand imbalance that should dampen the hit to activity from higher rates.
He explained: “What’s much more important is the amount of home equity that’s currently in the US economy, so in other words, because house prices have gone up so much relative to the mortgage outstanding, a lot of homeowners have a lot of equity and they haven’t tapped into that.”
In fact, the combination of inflation, high demand and low supply have raised forecasts by US home buying site Realtor.com for median sales price appreciation on US homes to 6.6 percent in 2022, an increase of 2.9 percent from previous predictions.
There is another aspect to the amplitude of equity in the housing market. Preceding the global financial crisis the consumer would remortgage and take out equity, which essentially kept the leverage in the housing market high.
Right now that’s not the case, according to Goldman. Today, US consumers are sitting on a lot of home equity which buffers them if house prices decline from negative adverse effects. Generally private sector balance sheets are much more healthy.
“We are expecting house prices to slow down for sure, and that’s critical, because shelter inflation is one of the most persistent components of US inflation,” said Mueller-Glissmann.
He added: “Labor is starting to slow down, commodities as well, but shelter is one of those areas that will linger a bit longer, so house prices coming down to some extent is very much needed and consistent with the Fed slowing down the economy and inflation.”
The IMF originally forecasted global growth at 4.4 percent in 2020, but this was revised downwards to 2.9 percent in June this year due to the war in Ukraine and the effect sanctions on Russia have had on gas supply and the global economy.
In terms of finding recession-proof sectors, Goldman has its eyes firmly on infrastructure, which is defensive but offers real cash flow growth. “We also like a combination of defensive assets and structural growth, like healthcare. At the same time we still think there’s value in places like banks and energy.”
“Banks & energy have suffered because of recession-fears, so especially in relief scenarios we could see banks doing incredibly well and energy to us is still an attractive area. We have been bullish on commodities and we remain on the bullish side, even in a bad case scenario.”
READ MORE: Morningstar has identified 14 cheap bank stocks trading at up to 45% below fair value. Here are the top names for investors to snap-up.
Meanwhile, the multinational investment bank shuns sectors that are exposed to gas and could suffer from that to some extent, especially in Europe. It is also underweight chemicals -particularly those which are exposed to the gas issues- as well as construction materials, consumer products and services, food & beverage, tobacco, retail & regulated utilities (due to current consumer prices and regulatory intervention, respectively).  
The New York-headquartered bank advocates a relatively defensive asset allocation and is neutral equities, neutral bonds, underweight credit, while being overweight cash and real assets. 
Mueller-Glissmann believes markets are getting too relaxed about recession risks near-term and too dovish with regards to central banks – but they are potentially too bearish with regards to growth in the long run.
“That creates opportunities to lean against, even though it’s a bit early. While we are defensive, we definitely see opportunities to size up against pessimism about inflation now and pessimism about growth potentially in the coming months, but right now after the relief rally we are still a bit defensive.”
The bank said it is also steering clear of the high growth tech rally, and would be careful to extrapolate that too far. 
“It doesn’t mean that there are no quality companies that are worthwhile investing in, but we certainly would be selective at this juncture. Also I think we are dealing with increased financing costs – for most companies the effect of the rising rates will be very delayed and pretty small.”
“There will be companies and businesses that are exposed to debt that have a much more floating rate however, so you should be careful with smaller midcaps. Their capital structures are potentially less stable and it can be more difficult for them to raise finance.”
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