2014 Forecast: Goldman is Bullish Japan & Europe, Bearish Gold

2014 Forecast: Goldman is Bullish Japan & Europe, Bearish Gold
Goldman most upbeat on Japan, Europe stocks in 2014

Goldman Sachs is most bullish on Japanese (EWJ) (NKY) and European (EFA) equities in 2014, according to the investment bank's latest asset allocation report, maintaining an overweight rating on both markets.  It set a 2014 target of 1450 for Japan's Topix index, and 360 for the Stoxx Europe 600 index - or 16 and 12 percent higher than current levels, respectively.  The indexes have risen 45 and 15 percent so far this year.

"We expect steady progress on the Abenomics' growth reforms during 2014, think the reflation story will support returns, and see the positioning as relatively light," Goldman strategists wrote in a report on Tuesday.  In Europe, Goldman expects corporate margins to pick up from cyclically low levels, and for that to support returns.

Equities in 2014: What to expect

"There are still latent risks in Europe due to the large outstanding debt stocks, but the near-term risks from this have been declining and we do expect European growth to pick up," they added.
Meanwhile, the bank said while it is underweight Asia ex-Japan equities over the next three months, it is neutral on the region over a 12-month horizon.

"Markets will start to focus more on the good 2015 earnings outlook as we move through 2014. However, especially in the near term, growth momentum does look better elsewhere and we therefore stay underweight over 3 months," strategists said.  It sees the MSCI Asia Pacific ex-Japan index (FXI) (EWY) rising to 525 by end-2014 - marking 12 percent upside from current levels. The index is up just 1 percent since the start of 2013.

As for the U.S. market (SPY) (DIA) (QQQ) (IWM), Goldman says it is neutral on the country's equities over the next three months, but underweight over 12 months.

"Longer term the return potential for the U.S. market is dampened by limited room for valuation and margin expansion given the strong recovery we have seen already," they said.  The bank's 2014 target for the S&P 500 stands at 1900 - over 5 percent higher than current levels. The S&P 500 has had a stellar run over the course of 2013, up more than 26 percent since the start of the year.

Goldman predicts steep losses for gold in 2014:
   
Goldman Sachs predicts a "significant decline" in gold (GLD) (GDX) (SLV) (SIL)  in 2014, following losses of around 26 percent in the previous metal so far this year.

Bullion is set to fall at least 15 percent next year, the bank said in a report of the top 10 market themes for 2014 this week, which warned of the growing downside risk for commodities.

The decline would bring gold down to $1,057 an ounce - prices not seen since early 2010.  Gold suffered a sharp fall this week as better-than-expected U.S. economic data raised the possibility that the Federal Reserve may start scaling back its $85-billion-per-month bond-buying program earlier than anticipated.

According to some market watchers, gold has yet to fully adjust to the reality of tapering, and is vulnerable to further weakness when the central bank finally begins to wind down its monetary stimulus - a major pillar of support that has driven gold to record high near $1,920 in September 2011.

"Gold is extremely sensitive to the Fed tapering monetary stimulus. Back in September when we had a surprise announcement from the Fed that we're not going to taper anytime soon, we saw gold rally 5 percent," Matthew Grossman, senior equity strategist at T-3 live.com.

"And then just a couple of days ago, the Fed minutes came out and they said taper is more likely sooner than later. And what happened? Gold fell 3 percent. We're seeing a very high correlation with that," Grossman said.

Gold bulls, however, remain unfazed. Victor Thianpiriya, commodities analyst at ANZ, expects the metal to hit $1,450 by end-2014, or 16 percent higher than current levels, driven by robust physical demand from China - the world's largest jewelry market.

"China has surprised the market on how strong demand has been. There's also potential for India (EPI) (PIN) demand to come back," he said.  Chinese consumer demand totaled 210 metric tons in the third quarter, a rise of 18 percent compared to the same period last year, according to the World Gold council. In India, however, consumption fell 32 percent on year to 148 metric tons, due to government's crackdown on gold imports.

Thianpiriya said he doesn't expect gold to get caught in a major sell-off when the Fed decides to taper. "Gold has priced a lot of that in. We don't think the reaction of markets will be quite the same," he said.

Courtesy of  Ansuya Harjani, cnbc.com