Goldman puts itself in ‘risk-on’ camp for 2011

Talk of China’s ongoing economic boom was overshadowed at Goldman Sachs Asset Management’s global conference by recommendations that America and North Asia represent better investments, and predictions that Japan will see inflation once more

GSAM positioned itself firmly in the ‘risk-on’ camp in London today.

Much of the event was upbeat on equities, while senior managers favoured industrial metals over gold, and revealed they were more bullish on America’s economy than consensus, for the first time since 2006.

GSAM chairman Jim O’Neill said investors should “start forgetting about 2008, it’s time to move forward. People continue to underestimate how powerful the world’s economy is”.

Goldman’s global leading indicator posted some of its strongest readings since September, “suggesting the recovery is not only broadening, but strengthening.

We have entered a period of higher sustainable GDP growth [and] global equity risk premia are very high. Unless you have a massive rise in government bond yields it is a favourable climate for further appreciation in global equities.”

GSAM’s chief US equity strategist David Kostin predicted the S&P 500 would hit 1500, though not without volatility which he expects in March.

Goldman predicts 3.4% US economic expansion this year – against 2.6% consensus – followed by 3.8% in 2012, again exceeding the 3.1% average.

Kostin said US corporate earnings would grow 14% this year, then 11% next year.
He predicted profit margins at US corporations would hit new highs, saying his outlook rested on domestic US factors more than on the rest of the world.

Kostin cautioned, however, that the Eurozone’s periphery and changes in China were threats, as was outstanding US public debt, predicted to hit its federally allowable ceiling of $14.3trn by March.

Timothy Moe, GSAM’s chief Asia Pacific regional equity strategist, said within Asia markets in northern nations including Japan should beat the south this year, and the US should outperform Asia.

Moe prefers Taiwan, South Korea and Singapore over India, whose current account deficit he said was supported by unsustainable “short-term portfolio flows”.

Moe also suggested reducing China exposure to mid-year as Beijing combats inflationary pressures. And expect most of Asia ex-Japan’s market growth of 26% this year to come mainly later in 2011, he added.

Moe noted the average institutional investor’s 6.5% allocation to emerging markets does not square off with their representing 11% of global liquidity, 31% of global market capitalization, 37% of global nominal GDP, nor a projected 50% of economic growth to 2020.

He said this could change as some Japanese pension schemes adopt new benchmarks heavier in developing markets. South Korea could benefit first, Moe said.

Kathy Matsui, GSAM’s chief Japan equity strategist, said a global pick-up in growth would shift the driver of Japanese growth back from domestic consumption to exporters.

Matsui added deflation, long a hallmark of Japan, could turn into slightly positive core inflation over 12 to 24 months.

Matsui added the Bank of Japan had signaled its willingness to intervene in FX markets again to weaken the yen against the US dollar.

However, she added investors should pay as much attention to the yen’s rate versus Korea’s won, a key exporting competitor, as against the dollar.

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