Goldman Tells Clients To Go To Cash As "Growth Shocks" Are Coming
After last week's warning by Ray Dalio that a 100 bps rise in yields could lead to trillions in cross-asset losses, it was Goldman's turn to pick up the bearish torch with a note in which it warned that stock markets are set for volatility in the remainder of the year as a result of potential "growth shocks" which continue to loom until year-end as political risks remain elevated, given the upcoming US presidential elections and Italian referendum, and the UK government’s plan to trigger Article 50 by March 2017.
The report by GS managing direct Christian Mueller-Glissmann comes at the same time that Goldman's chief economist David Kostin was similarly dour on the upcoming Q3 earnings season which begins this week, "warning that 4 out of 5 factors suggest disappointing results ahead", as per the following table:
Looking at the market, Glissman was more focused on the continued drift higher in rates, and said that “we have more potential for shocks right now” telling Bloomberg that “we have a slight tilt to be a bit more defensive, and tilt towards Asia and emerging markets relative to more developed markets. We are a bit more bearish on Europe and the U.S into year-end.”
The Goldman strategist is concerned by high U.S., valuations, saying that current levels can precipitate significant drops in the event of shocks. That’s the case particularly in the absence of sustainable profit growth to support prices. The S&P 500 trades at more than 18 times estimated earnings, compared with a 15.6 average for the past five years.
“Equities are a tough asset to own without a clear, positive trend in growth,” Mueller-Glissmann said. “It’s tough to deal with these equity draw-downs because there are very few places to hide except for cash.”
And indeed, as he writes in his latest note, "we stay defensive in our asset allocation and keep our OW Cash for 3m. We stay inclined to keep cash reserves in case shocks create more attractive entry points. We remain UW Bonds and maintain our 2% target for US 10-year yields by year-end: we expect a more gradual move from here but the risk of ‘rate shocks’ remains elevated due to uncertainty over the BoJ and ECB’s QE programmes, and the timing of the next Fed rate hike given US data recently. We stay OW Credit and N Equities (both 3m and 12m), although 12m forecast returns suggest investors should rotate from credit to equities. We think the case for credit vs. equities has weakened relative to previously."
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After last week's warning by Ray Dalio that a 100 bps rise in yields could lead to trillions in cross-asset losses, it was Goldman's turn to pick up the bearish torch with a note in which it warned that stock markets are set for volatility in the remainder of the year as a result of potential "growth shocks" which continue to loom until year-end as political risks remain elevated, given the upcoming US presidential elections and Italian referendum, and the UK government’s plan to trigger Article 50 by March 2017.
The report by GS managing direct Christian Mueller-Glissmann comes at the same time that Goldman's chief economist David Kostin was similarly dour on the upcoming Q3 earnings season which begins this week, "warning that 4 out of 5 factors suggest disappointing results ahead", as per the following table:
Looking at the market, Glissman was more focused on the continued drift higher in rates, and said that “we have more potential for shocks right now” telling Bloomberg that “we have a slight tilt to be a bit more defensive, and tilt towards Asia and emerging markets relative to more developed markets. We are a bit more bearish on Europe and the U.S into year-end.”
The Goldman strategist is concerned by high U.S., valuations, saying that current levels can precipitate significant drops in the event of shocks. That’s the case particularly in the absence of sustainable profit growth to support prices. The S&P 500 trades at more than 18 times estimated earnings, compared with a 15.6 average for the past five years.
“Equities are a tough asset to own without a clear, positive trend in growth,” Mueller-Glissmann said. “It’s tough to deal with these equity draw-downs because there are very few places to hide except for cash.”
And indeed, as he writes in his latest note, "we stay defensive in our asset allocation and keep our OW Cash for 3m. We stay inclined to keep cash reserves in case shocks create more attractive entry points. We remain UW Bonds and maintain our 2% target for US 10-year yields by year-end: we expect a more gradual move from here but the risk of ‘rate shocks’ remains elevated due to uncertainty over the BoJ and ECB’s QE programmes, and the timing of the next Fed rate hike given US data recently. We stay OW Credit and N Equities (both 3m and 12m), although 12m forecast returns suggest investors should rotate from credit to equities. We think the case for credit vs. equities has weakened relative to previously."
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