2016 outlook: Flatter and fatter, still pro-risk, but near-term neutral – Goldman Sachs

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 24, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Delhi) – Research Team at Goldman Sachs, presents their outlook of US for 2016.

    Key Quotes

    Pro-risk 12-month asset allocation, but more neutral 3-month: We have a pro-risk asset allocation (Overweight equities and credit, Underweight bonds) for 12 months, but see a flattening return trajectory for risky assets and more risks. Equity upside is mostly driven by markets outside the US. We expect bond yields to increase and weigh on returns for fixed income, but near term we see limited downside to bonds and are Neutral. We stay Neutral equities near term due to elevated volatility and risk of lower oil prices. We remain Underweight commodities on a 3-month basis, mainly due to downside for oil, but are less bearish over 12 months.

    Themes: Late-cycle concerns, rising rates and divergence: Late-cycle concerns are growing, in particular for equities with high valuations and decelerating earnings growth. We focus on non-US equities and call overwriting. Rising yields are likely to weigh on returns across asset classes, in particular in fixed income. We would avoid ‘bond proxies’ in equities and like US HY credit as elevated spreads should help buffer higher yields. With limited return potential across asset classes we focus more on relative value themes like monetary policy divergence.

    Risks: Bond/equity correlations, commodities and China: Following a decade of negative equity/bond correlations we see risk of further rate shocks in 2016, which are likely to result in a less stable relationship. We also see risk of further oil price declines in the near term due to storage capacity constraints, which might weigh on risky assets and in particular US HY credit. Finally, China growth and devaluation risks remain for 2016 and we like select EM FX hedges and MSCI EM puts.”
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