Where does the UK go from here? 🤔

It's been a busy week for China as it marked its 20th National Congress — a crucial meeting in the country's political cycle. --------------------------------------------------------------- China marked its 20th National Congress — a crucial meeting in the country's political cycle. [Is this an inflection point for China's economic policy?]( And the U.K. government continues to wrangle with a mini-budget that sent financial markets into tailspin. We take a look at what this might mean for the country's path forward. (Was this newsletter forwarded to you? [Sign up now.]( --------------------------------------------------------------- China's Congress: an inflection point? The 20th National Congress of the Chinese Communist Party promises to be one of the most significant events for China in modern history. President Xi Jinping is expected to secure an unprecedented third term amid the country's slowest pace of growth in decades. - The composition of the Politburo Standing Committee and how much Xi Jinping dominates it may indicate whether a policy inflection point is coming, Susan Shirk, chair of the 21st Century China Center at the University of California, San Diego said in the latest episode of [Exchanges at Goldman Sachs](. - But even if Xi dominates the Standing Committee as Shirk and others expect, will China's economic challenges compel Jinping to shift policy to reprioritize growth? “We think the big picture, long-term structural policies won't change that much,” Hui Shan, chief China economist at Goldman Sachs Research, told podcast host Allison Nathan. “The common prosperity to reduce income and wealth inequality. It's housing for living in, not for speculation. It's an environmental set of policies. It's the national security, whether it's food supply, energy supply, semiconductor, technology, the self-reliance…The cost is slower economic growth.” - However, David Li, professor at Tsinghua University, is relatively optimistic about China's near and longer-term growth outlook. “One of the most fundamental policy adjustments after the 20th Party Congress, will be to put economic growth still at the center of the Party's and the government's work,” Li says. Subscribe wherever you get your podcasts [Spotify]( | [Apple]( | [Google]( | [Stitcher]( --------------------------------------------------------------- The UK could be heading for a deeper recession Earlier this week, the U.K. government said it was reversing most of the tax cuts announced in its mini-budget from September in an attempt to calm markets. Goldman Sachs Research has downgraded its outlook for growth in the U.K. and expects a deeper recession as financial conditions tighten and the corporate tax rate increases in April. Our economists now forecast 2023 annual growth to be -1.0% (vs -0.4% previously), with non-annualized quarter-on-quarter growth of -0.6% in the fourth quarter of 2022 (vs -0.1% previously) and -0.4% in the first quarter of 2023 (vs -0.2% previously). --------------------------------------------------------------- How to protect a stock portfolio during a bear market When stocks are sliding deeper into a bear market, it can be hard (and painful) to remember that equities have the best chance of getting investors an attractive return over the longer term. But there are ways that investors can insulate portfolios of stocks and other risky assets until the turbulence subsides, according to Goldman Sachs Research. Many of these tactics are needed today due to a sharp change in monetary policy, which means bonds aren't buffering equities as reliably, according to Christian Mueller-Glissmann, head of asset allocation research within portfolio strategy at Goldman Sachs. As central banks are hyper focused on containing inflation, they can no longer try to cushion losses in financial markets. - Go up in quality. That can mean buying stocks and bonds of companies with strong balance sheets and steady profits. Stocks with proven business models that pay dividends can offer some protection in a bear market. The U.S. dollar is another example, Mueller-Glissmann says. - Hedge funds are providing a hedge. It was difficult for these asset managers to beat the index in the last cycle when just about everything was rallying. But they (in particular, trend-following strategies) may have a better chance when central banks are focused on inflation, Mueller-Glissmann says. Hedge funds beat the 60-40 portfolio in the early 1990s and the beginning of this century, particularly during bear markets. - Dynamic risk allocation varies a portfolio's risk depending on market volatility. “It's a simple idea: If things are volatile, you probably want to take a bit less risk,” Mueller-Glissmann says. “That probably means I need to own a bit less equity. This type of rule has, in the very long run, worked remarkably well.” - Options hedging can provide insurance. While this strategy has often been costly to implement especially over longer periods, our economists expect financial markets will be more volatile and recessions more frequent, which could lead to options contracts paying out more often. It could be an opportunity to sell call options (bets that an asset will increase in price) to buy puts (bets that an asset will decline in price). It's an old strategy that Mueller-Glissmann says could be useful for portfolios again. - Cross-asset option overlays also provide opportunities. Currencies and commodities, for example, tend to have larger swings in prices during periods of higher inflation, meaning a higher likelihood of a pay out from options linked to those assets. [Learn more about Goldman Sachs Research's portfolio strategies here.]( --------------------------------------------------------------- Private markets are open even as they face a major test Private markets, which have seen strong growth in recent years, are facing their biggest challenge in more than a decade, according to Goldman Sachs Asset Management (GSAM). But even as declines in public markets start to show up in the private sphere, there are still opportunities, Michael Brandmeyer, global co-head and co-chief investment officer of Alternative Investments & Manager Selection (AIMS), said in a media roundtable. “This is the first time in a while where performance is really going to be challenged and you're going to see the active management model of private market managers really be tested,” he said. - While the financial backdrop is challenging, providers of private debt are still able to step in with capital for borrowers, according to GSAM's co-head of private credit Kevin Sterling. A private lender may have a longer-term focus and be able to offer more customization for the borrower. - Key trends like sustainability, demographics and technology will help determine the investment opportunities in private real estate, says Jim Garman, GSAM's head of EMEA real estate. “The word that keeps coming up in real estate discussions these days is inflation,” Garman says. “Real assets generally do well in an inflationary environment, but it's really important to be on the right side of those three big themes.” - Many private growth companies have healthy cash balances given the record levels of fundraising activity and capital in the growth asset class in 2021, so they're not in imminent need of primary capital, said GSAM's co-head of growth equity Nishi Somaiya. “Many companies overcapitalized themselves in the last two years, just as the funding markets were so open and there was so much capital available and many of them don't need to raise [fresh capital] yet,” Somaiya said. “Within the next six to 12 months we will see that landscape shift and there will be more companies that, as their cash runway starts to shorten, will come back. For us, that should present opportunities to invest and support their growth.” --------------------------------------------------------------- US economy can weather global turmoil, Sharmin Mossavar-Rahmani says The current downdraft in equities and bonds is relatively rare, says Sharmin Mosssavar-Rahmani, the head of our Consumer and Wealth Management Investment Strategy Group (ISG). U.S. stocks and bonds have lost 24% and 9%, respectively, for the first nine months through September 2022. Negative returns in both stocks and bonds over 9-month periods have only occurred 3% of the time since 1927. Despite economic uncertainty, investors should stay invested in U.S. equities, according to ISG. The U.S. economy is well-balanced and can weather uncertainties, Mossavar-Rahmani says. Annualized returns since March 2009 are up +15% (data as of October 7, 2022). Although equities have already suffered a steep decline, history suggests investors are better off staying the course and even looking for opportunities to overweight stocks, she adds. That's because equity returns in the 6-24 months after bear markets have been well above average, according to ISG data. --------------------------------------------------------------- BRIEFINGS brainteaser: What's on Xi Jinping's mind? China's President Xi Jinping kicked off the 20th National Congress of the Communist Party of China with some opening remarks in Beijing. Which of these words did Xi reference most? A) Military/Army B) Security C) Development/growth D) People [Check the answer here.]( --------------------------------------------------------------- ICYMI: In the media [WSJ]( October 18 [Reaching consumers the Goldman way]( [Bloomberg]( October 17 [Goldman Sachs Tim Moe on APAC strategy]( [CNBC]( October 13 [Apple, Goldman Sachs introduce interest-bearing savings accounts as rates rise]( --------------------------------------------------------------- --------------------------------------------------------------- Some of the images used in this newsletter are sourced via Getty Images. The data provided in this newsletter is for information purposes only and should not be construed as investment or tax advice nor as a recommendation to buy, sell, or hold any particular security. Goldman Sachs believes the data in this newsletter is accurate, but does not verify its accuracy independently and does not warrant or guarantee that it is accurate or complete. Goldman Sachs has no obligation to provide any updates or changes to the data. No investment decisions should be made using this data. To the extent this newsletter includes material from the Goldman Sachs Global Markets Division, please [click here]( for information relating to Global Markets Division material and your reliance on it. To the extent this newsletter includes material from Goldman Sachs Asset Management, please [click here]( for additional disclosures. [Click here]( to unsubscribe. © 2022 Goldman Sachs, All rights reserved. 200 West Street, New York, NY 10282, USA --------------------------------------------------------------- [GS.com]( | [Careers Blog]( | [Privacy and Security]( | [Terms of Use]( [Twitter](