In the current economic environment, marked by recent equity market weakness and disappointing July employment figures, investors are increasingly concerned about potential slowdowns in growth. However, Goldman Sachs analysts have identified attractive put options as a sensible hedge against these growth risks.
Economists at Goldman Sachs have raised their forecast for the probability of a 12-month recession by 10 percentage points to 25%, due to an increase in the unemployment rate to 4.3% in July 2024.
“Although our economists assess the risks somewhat higher than the historical, unconditional 12-month average probability of about 15 percent, they continue to view the risk of recession as limited and do not expect it to lead to major financial imbalances,” the analysts said.
However, they assume that the markets will react particularly sensitively to new economic data, which is why hedging against growth risks is a strategic necessity.
As investors shift their focus from microeconomic factors such as earnings to macroeconomic indicators ahead of the September FOMC meeting, analysts recommend using put options on select stocks and ETFs.
The Volatility Index () has fallen 23 points since its August 5 rise, but both the index and individual stock implied volatility remain elevated relative to the recent past. This environment presents a challenge in finding cost-effective hedges, but Goldman Sachs has identified several occasions where option prices are relatively low despite high sensitivity to US growth.
Goldman Sachs conducted a detailed review of stocks and ETFs with high sensitivity to US growth. The options selected proved to be attractive hedging potential as they are relatively cheaply valued relative to the growth sensitivity of the underlying assets.
Among the individual stocks, KeyCorp (NYSE:), AerCap Holdings NV and Fifth Third Bancorp (NASDAQ:) stand out as particularly attractive put options. These companies are more sensitive than average to US growth and their options are relatively cheap due to their implied volatility.
In the ETF space, ETFs for financials, consumer goods and commodities are considered effective hedges. These ETFs have shown high beta and high correlation to US growth while at the same time option prices have remained low.
These ETFs’ recommended put options are structured to cover upcoming macroeconomic events, including the September and November FOMC meetings, the U.S. presidential election, and various major data releases.
Goldman Sachs also looks at specific thematic risks, including potential declines in mega-cap technology stocks and the impact of rising interest rates.
For technology stocks, which are currently trading at inflated valuations despite recent underperformance, analysts recommend tactical hedging through put options.
Given the increased prices of interest rate options compared to historical levels, put options are advisable to mitigate interest rate risks.
Goldman Sachs estimates the beta of each stock and ETF relative to cyclicals versus defensives using weekly data from the past three years. This approach focuses on the day-to-day sensitivity of assets to growth risks rather than relying solely on historical relationships.
The assets selected for hedging have liquid options markets and a high correlation with US growth, ensuring their tradability and relevance.
