Investors should start diversifying their portfolios, Goldman Sachs says

view original post

With stocks at record highs, investors should probably start making plans to diversify their portfolios, Goldman Sachs has said.

In a note, Goldman Sachs analysts, led by Peter Oppenheimer, said the sharp increases in stock valuations seen over the previous year have left little space for further gains.

Most Read from MarketWatch

The past year’s rally has seen markets become heavily concentrated around a small selection of U.S. tech stocks.

The S&P 500 index has over the previous year experienced one of its sharpest rallies since 1928 with the U.S. stock index having increased by 29% in the 12 months since last November.

Yet high levels of concentration have now left investors vulnerable to any disappointments, particularly with the “Magnificent Seven” mega-cap tech stocks that have driven the past year’s gains.

As such, investors should start making plans to diversify their portfolios now to protect themselves against any drops, the Goldman Sachs analysts said.

“Given high valuations and unusually high concentration in equity markets, we focus on diversification to improve risk adjusted returns,” the analysts said.

Investors should do this by seeking out bargains, particularly those that are likely to be boosted by falling interest rates.

The analysts noted the biggest companies previously achieved outsized gains when interest rates were going up as they suggested the situation could now reverse in the face of interest rate cuts.

The analysts said the past year’s gains were mainly driven by valuation expansions on the back of widespread optimism surrounding slowing inflation and the potential for interest rate cuts.

In the view of the analysts, investors should look at broadening their exposure to non-tech U.S. companies via indexes like the equal-weight S&P 500 RSP.

Investors should also consider looking for bargains overseas, including in the U.K., Japan and China, via indexes including the FTSE 250 UK:MCX, the analysts said.

In particular, Goldman suggested investors start looking at overseas companies that generate significant revenue in the U.S.

Trump’s victory in the U.S. elections is also likely to boost capital-markets activity and could create new opportunities for investors, Goldman’s analysts said.

The potential for more mergers and acquisitions could give investors a chance to make gains on companies being targeted, the analysts said.

Either way, Goldman’s analysts noted that U.S. markets could also continue to rise over the coming year, despite the record-high valuations.

Goldman’s analysts noted that in the years since 1929, the performance over the past year has had little correlation to the performances seen in the year immediately following.