More alpha and less beta. More stocks capable of generating extra returns and fewer stocks linked to market trends. Investment opportunities next year will be based on rotation between markets and across sectors. Goldman Sachs says so in a report just published in which it draws up the ten themes for investors in 2016. And it warns: "high valuations and rising rates, especially in the US, will present challenges for risky assets".
Analysts note that growth has consistently disappointed in recent years, but that hasn't stopped risky assets from substantially increasing in value. “In 2016 – they add – we expect activity to continue to expand in developed economies, driven for the most part by consumption. But high valuations and rising rates, especially in the US, will present challenges for risky assets. As a result, investment opportunities next year will be based on the rotation between markets and sectors. In short: more alpha and less beta”.
Goldman Sachs expects inflation to rise above market expectations in 2016, which it believes are too conservative. “This – explain the analysts of the business house – will dictate the pace of the increase in nominal bond yields. Our baseline estimates point to greater divergence on short-term rates within the G10 countries (as the Fed tightens and the ECB and BoJ ease), generally higher bond yields and steeper curves.
In terms of currencies, the analysts' most solid view regards the dollar, which they see as further strengthening against the other G10 currencies, while they expect a certain stability for the emerging currencies during the year, especially where the imbalances have corrected.
On the commodities front, risks to energy and industrial metals prices are skewed to the downside in the near term. But for experts, the theme for 2016 will remain that of "lower for longer" prices. So they prefer operating expense-related commodities, such as oil, over investment-related commodities such as copper.
Here is a summary of the ten themes for next year:
1.Global growth: more stable than it seems
Goldman Sachs estimates indicate a world GDP of 3,6% in 2016 from 3,2% in 2015. For investors, the analysts explain, the relative stability of growth in both developed and emerging countries should be able to offset the fears related to this year's slowdown in manufacturing production, the tightening of financial conditions in the US and the prospect of a rate hike by the Fed. For Goldman Sachs, the industrial slowdown was only a passing phenomenon linked to decisive cuts in the energy and mining as well as China's efforts to rebalance demand.
2. US inflation: less downside risk than what is priced
Due both to the recovery in employment levels and to the dynamics of oil prices, analysts believe that the market is overpricing a further risk of downward inflation. Goldman Sachs expects inflation rates to rise in both developed and emerging economies. In the first case, +2016% in the USA and +1,8% in the Eurozone, +1,1% in Japan are expected for 0,3. Inflation which will rise in 2017 to +2,4%, +1,6% and +1,5% respectively. “In most developed countries – analysts explain – these numbers indicate that core inflation will still remain below central bank targets, but the gap will be significantly smaller than now. And fears of deflation will be dropped."
3. Monetary policy: divergent
The American recovery of the economy and employment will lead to a tightening by the Fed, almost certainly starting in December, which Goldman Sachs believes will be more aggressive than what the market expects. Conversely, in the meantime, the ECB and the Bank of Japan will remain accommodative due to the fragility of the economic recovery, the weaker starting point of inflation and the greater dependence on a slowdown in China and emerging countries.
The dollar will be the main beneficiary of all this with an appreciation that analysts estimate around 20% against the G10 currencies by the end of 2017. The 12-month estimates remain for a euro/dollar exchange rate at 0,95, but at the at the same time they believe that this level could be reached earlier in the event of aggressive monetary easing action by the ECB in December. Estimates on the 12-month yen also remain at 130, again a level that could however be reached sooner.
4. Oil prices; downside risks in the short term, upside at the end of the year
Analysts estimate that the WTI will rise to 52 dollars a barrel by the end of 2016 and believe that in the short term, however, there is a high risk of downside on prices since inventories are at record levels.
5. Relative value in commodities
For 2016 the theme will still be “lower for longer” prices for commodities, plus the question of demand tilt. Efforts to rebalance China's demand from investment to consumption will reduce demand for investment-related commodities such as steel, cement, iron, much more than it will decrease demand for operating commodities, such as energy and aluminum. Indeed, Goldman Sachs points out, energy demand in China continues to rise, not fall. As a result, many investment-related commodities will further differentiate their price behavior relative to oil in the coming years.
6. Surplus in world savings: in reverse
In 2005, Fed Governor Ben Bernanke spoke of the effects that high oil prices were having on the fixed income market through the "global savings glut" (The global savings glut and the US current account deficit', speech given to Virginia Association of Economists, March 10, 2005). In just a few years, oil prices soared to $140 a barrel as petrodollars were reinvested in the financial system. The hunt for the yields of these cash flows was later considered by many to be the fuse that ignited the credit market excesses that led to the 2008 financial crisis.
Now, Goldman Sachs analysts point out, savings from petrodollars have collapsed, as have savings from emerging currency reserves. A decline that suggests rate declines, just as the rise in petrodollar savings had been bullish for rates. According to Goldman Sachs, therefore, "lower for longer" oil and commodity prices will have the effect of reallocating global income from savers to consumers, drying up one of the major contributors to the phenomenon of "global savings glut" identified by Bernanke.
7. Rise in US shares: limited by the "Yellen call"
For Goldman Sachs, the stock upside will be limited in 2016. The target for the S&P500 index is set at 2.100 points, a potential upside of about 5% from current levels, while earnings per share are expected to increase by 10,1, 5% eip/e will drop by XNUMX%.
In essence, stocks and risky assets, analysts say, will bear the impact of the rate hike without the usual buffer given by better-than-expected growth because given the delay in the increase in the cost of money, the positive surprises that normally accompany the rises are reasonably already behind. And the "Bernanke put" will be replaced by the "Yellen call". Put another way: just as monetary policy reacted aggressively to bad news in times of downside risks, now that risks have abated, monetary policy will react more aggressively to positive news and be less accommodative.
8. Emerging Markets Risk: Slowdown, Not Collapse
Like many investors, Goldman Sachs is also worried about the debt burdening emerging countries, especially in China where the debt/GDP ratio has risen to almost 100%, and believes that growth will remain under pressure. However, experts believe that the collapse of emerging markets is not inevitable because the nature of the emerging markets challenge is different. “Most debt is denominated in local currency – explains Goldman Sach – which means that emerging economies are less vulnerable to the traditional crisis model involving sovereign debt in hard currencies”. Thus, for Goldman Sachs, the real challenge is linked to knowing how to navigate weak growth prospects and the institutional capacity to do this.
9. Market Liquidity: The “new normal” is less
One of the market developments following the crisis has been the palpable loss of liquidity in fixed income markets, especially in asset classes such as corporate credit. For Goldman Sachs, alongside the regulatory issue, the causes are also to be found in other factors, such as new technologies and the decline in liquidity on CDSs. Experts believe there is no reason to think that market liquidity conditions will improve in 2016.
10. Corporate Profits: Only a temporary loss
After the 2010-2011 recovery, US corporate profit growth has been on an unstable path. “Do recent trends suggest that corporate earnings have lost their momentum?” Goldman Sachs analysts ask. The stable or rising trend on median margins is one of the best aspects of the post-crisis period. Instead, the disappointment came from real revenue growth, which has twice experienced a mild recession. For analysts, however, assuming margins are maintained, there is ample room for renewed revenue growth and there appears to be no reason to fear that inefficiencies in cost increases or a reduction in pricing power are starting to weigh on profits.
