Financists are often accused of extrapolating recent trends to establish their forecasts. Sometimes it happens that a trend has enough momentum or, alternatively, enjoys fairly strong fundamentals to last. Time will tell whether Dominic Wilson, chief market economist at Goldman Sachs, was right.
Before going into the details of the trends , here are some of his predictions for next year:
– The S&P 500 will finish at 2015-2100, 2.5% more than its current level of 2028;
– US 10-year benchmark rate will reach 3%, compared to their current level of 2.32%;
– Gold will complete the 2015 US $1,050 an ounce, down to almost 11%
Now what are these ten trends?
1 – A broader global growth
The US economy will remain on its current growth path and will continue to be the leading global locomotive.
The favorable monetary conditions and the decline of oil will nonetheless provide a boost to the economies of Europe and Japan.
The economies of emerging markets also improve, although the growth in China will continue to slow down. New shocks in Europe and China remain the two main risk factors.
2 – The differences persist among developed countries
Economic divergences obviously influence the monetary policies. While the US Fed is moving toward a first increase of interest rates, the central banks of Japan and Europe will extend their monetary easing.
Wilson expects in particular that Britain and Norway will have followed Fed with rising rate by 2015, if there is no economic relapse in Europe.
3 – A new regime for oil
The violent fall of US $30 a barrel since June for oil marks the beginning of a new price regime. The decline of oil, which is expected to continue a little, like that of other commodities, will shake producers but enrich consumers.
A sharp jump in the ability of oil service providers will result in a drop of 10 to 15% of costs for producers, if we add figures that indicate lower oil prices. More production from Libya, Iraq and Iran could also boost fuel glut next year.
4 – The deflationary forces and their remedies continue
Deflationary forces from the euro area and the fall in prices of commodities will continue in 2015. These evil forces for economic growth will force central banks to maintain their monetary easing. Wilson states that the European Central Bank could buy more active sovereign bonds that do not provide the observers.
5 – The US dollar will remain strong
Who says monetary easing in Europe and Japan also said weaker currency for both countries.
The US dollar will continue its momentum next year, compared to the other currencies of the G10 countries. This is the forecast about which Mr. Wilson said to be the more confident. Investors underestimate the strength and duration of this trend, he added.
6 – The rate hike by the Fed thwarts consensus
Mr. Wilson expects that the first increase in the Fed’s key rate comes in September, a bit later than expected, due to the low inflation and the perception that early increase would be detrimental to recovery.
Although Mr. Wilson expects that the Fed will increase its key interest rate a little more than foreseen by consensus, he does not fear that the normalization of rates causes a significant break on the stock market or in other asset classes. The rate hike will bring a lot of volatility, but it should not disturb the value of assets nor sustainable economy. The disinflationary forces and relaxation rates in other industrialized countries will help the Fed and the markets to change cash regime.
7 – China more inert
China’s growth is expected to continue to decelerate, as the pace of long-term cruise, forcing the government to intervene periodically to manage imbalances in the economy.
Locally, the transition of the Chinese economy could create opportunities for investors on the stock market. The recent linking of Shanghai Stock Exchanges and KongKong generate interest and send other capital in Chinese Class A Shares. But Wilson would avoid investing in shares of the Chinese real estate sector because of excessive debt levels.
8 – A portrait dispersed for emerging markets
Emerging markets begin 2015 in better shape than last year, thanks to lower inflation and better fiscal situation. Overall, these countries are less vulnerable than before to the possible increase in interest rates in the US and Chinese slowdown. India, Thailand and Chile are already established.
In contrast, Brazil and South Africa have much to do to reduce their dependence on foreign capital to finance their deficits.
9 – Low volatility, but spasms
However, other markets will be prone spasms, such as in last October, as the pros dominate trade.
10 – The yields shrink
Although the overall prospects are quite “benign”, the courses of the majority of investments have reached a level that reduces the returns that can be expected over the next few years. However, the performance that provides LDES corporate profits (earnings yield) remains much higher than expected from government bonds. In addition, the environment is conducive to the actions of multiple assessment remain above average and increasing, even in the United States.
That said, investors should rely on more modest returns, with the exception of Japan and emerging markets.