Remain Pro-Risk – Goldman Sachs

Goldman recommends investors to « remain pro-risk » going into 2018, meaning overweight equities, be neutral on credit and underweight bonds.

Of course they give some granularity to this outlook, as represented in the following table:

Source: Goldman Sachs

The big picture is that global growth is going to be relatively solid next year, while inflation and rates might go up, but not excessively high or too rapidly.

Bonds will deliver negative total returns in 2018, after low returns this year. « Our view for higher 10-year bond yields reflects a combination of a distinctly hawkish call on the Fed and an increase in the term premium », they write in a note published today.

« We have a preference for JGBs, where we see the least negative returns. For EM local bonds, it should be harder to climb in 2018. Local bonds have performed well since 2016 not just owing to FX strength, but also a powerful disinflationary impulse across EMs-a trend we think is largely behind us. »

Key trade ideas in the rates universe include for instance short US 10Y Treasuries, long EUR 5-year 5-year forward inflation or short intermediate UK/US duration.

Equities are an overweight, with a preference of Asian equities ex-Japan on a 3 month horizon but a more balanced view among regions on 12 month. After 19% price returns for MSCI All Countries World, « we expect returns to moderate in 2018, but remain strong amid good growth », says GS.

The bank expects higher than consensus earnings growth numbers. The bank also has a preference for EM equities rather than DM.

« Although correction risk is high, with low recession risk we don’t think a bear market will start in 2018, even if the macro environment may gradually become less favourable as rates and inflation pick up », GS’s strategists add.

Key trades include long MSCI EM, long structural growth, capex spenders (in Europe) and capex beneficiaries (in Japan), and strong balance sheets.

Credit is neutral do to limited return potential and the « risk of a correction is elevated, though supportive macro fundamentals should limit the magnitude and the persistence of the widening. »

Two major risks must be monitored closely according to the bank: « pockets of idiosyncratic risk in secularly challenged HY sectors could gradually morph into a directional driver of risk appetite. Second, labour market overheating and rising wage inflation present a potential headwind for credit quality. »

The bank prefers IG to HY and EM to DM credit. Key trades include long EMBI vs US HY; overweight IG vs HY (in EUR and USD), overweight banks and underweight autos in US IG, overweight BB-rated bonds over their B and CCC-rated peers in US HY, underweight HY bonds vs leveraged loans.

Finally, commodities is overweight over 12 months but neutral for next 3 months. « We stay bullish based on 1) a maturing business cycle, 2) the return of backwardation to commodity markets, and 3) diversification », GS writes.

In the commodities compound, GS prefers some metals (copper) to others (aluminium), and recommends an overweight in the S&P GSCI Commodity Enhanced index over 12 months.

Here are some tables/charts that I found interesting and might help understand where the markets are.

Source: Goldman Sachs
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Source: Goldman Sachs
Source: Goldman Sachs

 

 

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