Goldman Still Prefers Strong Balance Sheets Amid Credit Concerns

(Bloomberg) -- Investors should continue to favor stocks of companies with strong balance sheets as credit spreads are likely to continue widening, according to Goldman Sachs Group Inc.

“Further widening of spreads will continue to drive outperformance of strong balance sheet stocks,” strategist Caesar Maasry wrote in a note Thursday. That will remain the case even as “equity and credit markets are both reflecting balance sheet concerns.”

Goldman Still Prefers Strong Balance Sheets Amid Credit Concerns

The firm had cautioned against record-high net leverage and urged investors to focus on balance-sheet strength in a note dated Oct. 4. Since then, the S&P 500 has fallen 8.6 percent, buffeted by concerns about everything from the pace of Federal Reserve interest-rate hikes to the U.S.-China trade spat to signs of decelerating global economic growth.

“Macro investors are focused on the potential downside risks heading into 2019,” Maasry wrote in the report Thursday. “The continuous widening of U.S. high-yield spreads since October is keeping investors keenly focused on late-cycle risks.”

Goldman Still Prefers Strong Balance Sheets Amid Credit Concerns

Relative price-to-book ratios of strong-balance-sheet companies compared with weak ones have correlated strongly with U.S. spreads since 2011, Goldman said. The firm expects spreads to continue widening into 2019.

“The signal for equity markets is much clearer vis-à-vis credit spreads than rates,” Maasry wrote. “Strong balance sheet companies have consistently outperformed during periods of widening credit spreads, even if they coincided with lower rates.”

©2018 Bloomberg L.P.