Inflation, ESG, China: The top 8 investment themes for 2022

Candice Tse, managing director and global head of strategic advisory solutions at Goldman Sachs Asset Management, joins Yahoo Finance Live to break down eight investing themes for 2022, which include inflation, rising rates, sustainable investing, China, and volatility.

Video transcript

JULIE HYMAN: It seems pretty clear by now that it could be a rocky year. It certainly has been a rocky January in US equities thus far. So let's talk about some ideas that might help you navigate 2022. Candice Tse is Managing Director and Global Head of Strategic Advisory Solutions at Goldman Sachs Asset Management.

And you guys put out a report looking at sort of eight investment ideas or themes for the year and how to play them. And I want to start with your first one because I think this is probably the most overarching of them, right? The president alluded to it last night.

I'm talking about inflation, or what you guys term as inflation uncertainty because there are so many moving parts here. So first of all, kind of, how do you base case something like inflation uncertainty in this environment? And then secondly, we can talk about how to play it.

CANDICE TSE: Absolutely. Hi, Julie. Thanks so much for having me. In terms of inflation, I think the inflation spike that we've seen has surely surprised many people. Moving forward, we do think those numbers do come down.

So by year end, our expectation is for core PCE, actually, to come down to about an average 2.5%. So in thinking about where we are with inflation now, which is much higher than we've seen for a long, long time, a lot of investors have angst in the markets. So the way to invest during this time of inflation uncertainty, we would say is a couple of fold.

First and foremost, equities, actually, is one of the best performing asset classes over the long-term in terms of fighting inflation. And we've seen the ability for various sectors across equities to be able to do that as inflation rises, as interest rates rise, everything from different sectors, from financials, energy, basic materials. Those are some areas that can greatly outperform in these times of uncertainty.

And then on top of that, if you're looking at areas of fixed income investing, you can take a look at multi-sector strategies. In particular, areas like bank loans could be very interesting at this point. And then of course, folks are thinking about things like TIPS. While they may not provide the diversification factor as other investments may do, they can track inflation quite better than others.

BRIAN SOZZI: And Candice, I would argue, so many investors have been lulled into thinking just put their money in passive investment strategies, and that will work out well. But you are saying in this report, it's time to be more active with how you manage your money. Why is that?

CANDICE TSE: Absolutely. So if you think about the last 18 years, it has been a beta rally across asset classes. Moving forward, it will be much more differentiated across the board. So alpha becomes much more important in terms of your returns than just getting access to the market.

So finding the right managers, being highly selective will be the key. Whether you're assessing and accessing equity markets, fixed income markets, alternative markets, it will be the differentiator, especially this year in 2022.

JULIE HYMAN: And, you know, when people are looking to that, you know, you hear folks saying this a lot going into this year. How do you find those people? I mean, you know, how do you find the people?

Are you looking for a consistent track record? Are you looking for-- you know, what's your, sort of, criteria, if you will?

CANDICE TSE: Absolutely. Lots of managers out there. Track record is one. Also, experience, expertise, teams, I think, as you look not just at investing here in the US but going global, making sure that the managers that you're looking at actually have feet on the ground, know the culture, know the language. I think that's very important.

Making sure that you have managers that are going out and speaking with company management and doing the due diligence and the research, not only on the company. But these days, given the important focus on things like sustainability and ESG metrics, just making sure that not only are the company numbers aligned with what you're looking for but also what companies are doing from an environmental, social and also governance front.

BRIAN SOZZI: And Candice, within-- let's just stay on ESG. If one is looking to build out a portfolio of [? ESG-mind ?] investments, what do they need to be looking for, and what sectors should they gravitate to?

CANDICE TSE: Absolutely. There is no shortage of sustainable investments these days, much different from a couple of decades ago. And there's lots of tools to use to assess this environment. I think the important things to think about when it comes to sustainability is what companies are doing in terms of management, but also what they're doing in terms of their business.

How are they treating their employees? How are they treating their customers? All of those things are assessable through different analytic systems, but also accessible through hiring outside managers who can actually do that work for you, because it's difficult just for you as an investor to try to pick and feel your way through the stock market without really looking under the hood to see if what they're doing is truly ESG [? in ?] [? assets. ?]

So I think from a standpoint of investments, it's really important to focus in on what firms are doing, not only from a green perspective but also technology is important. Because from a sustainability side, you're going to have opportunities, whether you're looking at green infrastructure. Right. So you'll see opportunities, even though we're building green infrastructure, base metals, you know, over the course of the coming years will be highly important to build that infrastructure.

It will be about green infrastructure. It'll be about medtech, green tech, fintech, all of those things will come under the umbrella. So lots of areas to look at. It's just not one siloed area. And I think the investors are actually seeing the benefits of investing sustainably through COVID-19, because, I think, before the pandemic, lots of investors thought, I don't want to give up returns to be green, but now they're actually seeing that investing in companies that are ESG-friendly can tend to outperform the index, especially over the recovery of this pandemic.

JULIE HYMAN: And Candice, I want to put together some of the different themes you've been talking about and that you talked about in your note, because I know you say, look beyond the US, you say you can't ignore China. China's central bank today cut rates. They're already in a tightening cycle. Of course, they're also still growing at a relatively fast pace relative to the rest of the world.

At the same time, when you're looking at these ESG factors that you're talking about, China has some challenges when it comes to investing, particularly what's going on in Xinjiang, for example. So how do you counsel investors to look at China and sort of navigate some of those waters?

CANDICE TSE: Absolutely. There's no shortage of volatility, especially in the near term, and we understand that. There's a big shift in terms of what the government is looking for. They are looking for and seemingly accepting of lower GDP and hope for more resilient GDP going forward.

And with that said, many different types of regulations are being passed across the board. Then you have issues with the property sector, and then you have concerns over things like what they are doing from a sustainability standpoint. With all of those in mind, there are sources of volatility near-term. But if you think about China long-term and also emerging markets, I do think that China is too big to ignore.

They are the second largest, you know, economy in the world. Their population has over a billion people. So as you think about that, there are ways to access this market. You don't have to invest in everything within the Chinese market. You can access, for example, the Asian market, which is a very local market, which you can gain access to companies that may not be listed in our local exchanges, but are highly relevant in their markets.

You can access it through many different ways, like bonds as well as they increasingly get included into different indices. That will be huge-- have a huge impact into this market. So China, I would say, even though there may be some volatility near-term, it is simply too big to ignore in portfolios.

JULIE HYMAN: Candice, thanks for your time this morning. Candice Tse is Managing Director and Global Head of Strategic Advisory Solutions at Goldman Sachs Asset Management.