Is inflation finally falling?

 

Is inflation finally falling? Do people have spending power?

There are tentative signs that the high and sticky inflation of 2022 could be on the decline, according to Goldman Sachs Asset Management's annual Investment Ideas report.

But that doesn't mean inflation will fall evenly across the board. For example, a pressing risk is that tight labor markets fail to relieve pressure on wages and services prices. Also, fresh supply shocks, particularly for commodities, are a possibility. Goldman Sachs Asset Management outlines some key ideas for navigating inflation in the year ahead:  Take a strategic approach to real assets. If inflationary pressures remain elevated in the medium term, real assets such as real estate and infrastructure typically perform well in inflationary environments. Infrastructure assets have benefitted in this environment as their cash flows are typically underpinned by contracts linked to inflation. Additionally, governments are currently embracing some of the largest infrastructure investments in history, thanks to the Inflation Reduction Act.   Time to invest in innovation? 2022 was a difficult year for many technology companies. But given these companies' low valuations, it might be an attractive time for active investors looking to invest in innovation.  Consider small-cap companies. Small-cap stocks have historically performed better than large-caps when inflation has been high and falling. If inflation continues to ease or if the economy slips into recession, these assets may be able to deliver a repeat performance. Read the full publication for more investment ideas around fixed income assets, recession risks or China's reopening.

Buybacks boom in the UK and euro area

Buybacks, a practice where companies repurchase their own stock, have been increasing in the U.K. and euro area, according to Sharon Bell, a senior strategist on the European Portfolio Strategy team in Goldman Sachs Research. Over the past year, the pace of buybacks in these regions has been higher than in the last 20 years, Bell said at this week's Global Strategy Conference. Buying back shares indirectly returns cash to shareholders. Indeed, a buyback program reduces the number of shares, which boosts the share price while keeping valuations constant.

“We tend to focus on buying back shares as something the U.S. market does — absolutely it is something the U.S. does in much greater magnitude than Europe,” Bell says. “But actually in the last year or so, we have seen a huge increase in the U.K. and the euro area.”