Goldman: Take On Risk With Europe & Japan
Goldman telling clients to take on risk
by John Melloy
Goldman Sachs' global, cross-asset strategy team is recommending investors shake off the volatility of the new year and take on more risk by investing in European and Japanese stocks and underweighting global government bonds.
"We maintain our pro-risk stance after a volatile start to the year. Risky assets have been correlated with falling oil prices due to growth and deflation concerns," states the report. "While macro data has been mixed YTD, the ECB's QE announcement should further drive the global search for yield and push investors up the risk curve. Also, lower oil and easing financial conditions in Europe and Japan should help growth."
The firm sees oil prices (USO) getting much worse before they get better with WTI Crude falling to $39 a barrel at some point in the first half of 2015. The team then predicts a giant bounce before the end of the year on the magnitude of 40 percent.
"We downgrade commodities to underweight on a three-month basis as we see further downside to oil prices, the largest component of the S&P GSCI, as well as copper (JJC) and gold (GLD) prices. Negative roll yields also point to a more negative near-term view. However, we expect oil prices to recover to the marginal cost of production (U.S. $65 for WTI, U.S. $70 for Brent) by the end of the year, which implies strong return potential. Thus we upgrade commodities to overweight on a 12-month basis, with a view to revisit long positions toward the middle of the year."
Other predictions in the sweeping report from the firm's key strategists around the world including Christian Meuller-Glissmann, Peter Oppenheimer, Francesco Garzarelli and David Kostin are for the euro (FXE) to fall to parity with the dollar in two years and the Federal Reserve to delay a rate hike until at least the September meeting of this year and maybe even a push off until 2016.
"Downside risks to the inflation outlook are increasing, with lower oil prices and the stronger dollar. Our economists believe the probability of a shift in the Fed rate hike cycle into 2016 would increase significantly if core inflation declines close to one percent," according to the report sent to clients Tuesday.
While the S&P 500 is off about one percent for the year, the European benchmark, the Euro Stoxx 600 Index, is up almost 8 percent.
Japanese benchmark, the Topix, is up more than 11 percent. Some ETFs that U.S. investors can buy to mimic the performance of those foreign indices include the SPDR Euro Stoxx 50 ETF (FEZ) and the iShares Japan Large-Cap ETF ITF (EWJ) or the WisdomTree Japan Hedged Equity Fund (DXJ), which hedges against a drop in the yen.
Goldman predicts this outperformance will continue as those region's currencies fall relative to the dollar. Europe will see 6 percent more gains from here to 12 months out, nearly doubling the 3 percent return expected for the S&P 500.
Japan, meanwhile, will soar by more than 15 percent from here before the year is out.
"The equity markets with the strongest return potential are those with weakening currencies," the report said.
Goldman advises not to give up on all U.S. equities, however.
Technology (XLK), telecom (XTL) and energy (XLE) shares should be overweights for U.S. investors as those sectors fit with its higher risk theme. The State Street Select SPDR funds are among the ways for the average investor to mimic Goldman for those calls.
While the firm's down-to-up oil forecast for 2015 may be dismissed by some as a copout by the team, the investment bank is at least trying to give clients a blueprint for trading around the biggest drop by a major asset class in six years.
"WTI should trade close to $40 a barrel for most of 1H 2015, in our view, which will slow supply growth, keep further capital investment in U.S. shale sidelined, and balance the global oil market by 2016. Due to increased storage capacity, we do not expect a further sharp decline in near-dated prices, and see a U-shaped recovery in prices."
Courtesy of CNBC.com