Before you dive into your 2013, take a look inside the minds of top investors! To get beyond the conventional predictions — following are the “The Top Ten News Predictions That Will Dominate In 2013″ from Goldman Sachs’ Economics Research team 18-page report, led by Dominic Wilson. Taken together, these extreme market themes predictions, provide interesting insights into how market could evolve during 2013.
What’s your extreme market headlines predictions for 2013? Please include your prediction in the comment section below.
One thing’s for certain, there will be at least one twist in 2013 that you don’t expect.
Prediction 1: Global growth: A ‘hump’ to get over, then a clear road ahead – Global economic growth will be week in early 2013.
- Weak growth in early 2013 but a sustained recovery if that period is navigated
- Increased fiscal restraint going into 2013, moderating in 2013H2 and beyond
- Spanish economic and Italian political risks most intense in early 2013
- ‘Room to grow’ globally given output gaps, particularly in advanced economies
- Relaxation of the global energy supply constraint
“The biggest challenge from a markets perspective is that we see risks to growth concentrated early in the year, with Q1 likely to show a step-down in growth globally.”
Prediction 2: More unconventional easing in the G4 -
- Ultra-low policy rate environment to continue
- Fed to move towards macro-based criteria; ECB to conduct private asset purchases
- Some chance of a larger shift in BoJ policy, although not our central case
Interest rates will stay ultra-low in the world’s largest economies – Interest rates will stay ultra-low in the world’s largest economies. “Fed to move towards macro-based criteria; ECB to conduct private asset purchases.”
“However, the most hotly debated shift currently is whether the BoJ will make a more convincing attempt at easing. … And while we do expect incremental progress, our central case is not for a quantum leap in BoJ policy, particularly in the near term.”
Prediction 3: Termites eat away at the foundations of the ‘search for yield -
- Higher UST yields in 2013 but no big shock disrupting the search for yield
- Towards 2014, a growing risk to bonds from above-trend growth, diminishing QE
- Search for yield to continue to find corporate credit, but risk-reward deteriorating
- Increased risk that easy credit will lead to corporate re-leveraging
US Treasury yields will rise modestly – US Treasury yields will rise modestly. But investors will be driven toward corporate bonds as they look for yield.
“Increased risk that easy credit will lead to corporate re-leveraging … [E]xcluding peripheral Europe, corporate credit quality (as measured by debt-to-earnings measures) remains good in most markets, and this should continue to support the fundamental risk profile of most credit portfolios.”
Prediction 4: Housing stabilization and private-sector healing in the U.S. -
- Further modest US home price gains and continued increase in housing activity
- A gradual reduction in the private-sector financial surplus
- Record-low mortgage rates and slow thawing in US lending conditions
US housing activity will continue to increase, as mortgage rates remain record low and lending conditions loosen.
“On that front, two kinds of assets come to mind. The first is select vintages of the ABX index on subprime mortgages. … The second is US domestic banks, which could benefit further from a gradual normalisation of housing credit finance if home prices continue to drift higher.
Prediction 5: Euro area a smaller driver of global risk, but still a source of tails -
- Weak European growth, and a continued ‘muddle-through’ in central case
- Spanish economic risks intensify in early 2013, mediated by ECB interventions
- Economic pressures ease in Italy, but political uncertainty from general elections
- France fundamentally weak, but easy financial conditions an offset
European growth will be weak, with Spanish economic risks and Italian political risks intensifying early in the year.
“With risk premia still wider than elsewhere, and larger than warranted by fundamentals alone, further policy progress – and an absence of fresh stresses – could see incremental gains in Euro area assets.”
Prediction 6: Continued divergence between core and periphery in the euro area -
- Continued divergence in economic outcomes between periphery and core
- More signs of ‘overheating’ in Germany as forecast horizon extends
- Outperformance of peripheral ‘traded’ sectors and core ‘non-traded’ sectors
“The divergence in growth between the Euro area core (Germany in particular) and the periphery (Spain in particular) is set to continue. Periphery weakness is already well-known, but the potential for German overheating is a more distinctive theme.”
Prediction 7: Emerging Markets growth pick-up revisits capacity constraints -
- A pick-up in growth across EM in 2013 but less ‘room to grow’ than in DM
- Limited acceleration in China, followed by stable growth
- Inflation increases tightening risks in places in late 2013 and 2014
Emerging Markets will see growth accelerate but they will also have “less room to grow” than developed markets. Inflation will increase the risk of tighter monetary policy.
“We think EM equities should have a better year, but the upside potential may be limited by the fact that inflationary pressure and a potential shift towards tightening could come earlier than the market expects in places.”
Prediction 8: Emerging Market differentiation continues -
- Responses to inflationary pressure likely to differ
- Current account imbalances an issue in some economies
- Some idiosyncratic imbalances in EM economies
Responses to inflation and current account imbalances will differentiate the emerging markets.
“[T]he differences across EM are at least as striking as their similarities… The market may be underestimating the scope for rate hikes (in some ASEAN markets, such as Indonesia or Malaysia) or overestimating the scope for easing in places (Poland), especially if global yields drift higher as well.”
Prediction 9: Commodity constraint to loosen in the medium term -
- Cyclically tight markets but structurally more stable
- Despite more stable prices, positive carry likely to persist
- US energy supply story gradually loosens global oil constraint
- Pipeline constraints from mid-west US likely to ease
“US energy supply story gradually loosens global oil constraint.” “Most importantly, we expect oil markets to return to a more structurally stable position, where the ability to bring on new supply in the $80-90/bbl range is rapidly increasing. The relaxation of the energy supply constraint globally reduces one major obstacle to a global recovery as we look to above-trend global growth into 2014 and beyond.”
Prediction 10: Stable China growth, but not like the old days -
- Sequential peaking in China housing cycle puts pressure on iron ore/coal
- Copper supported in the next 6-9 months, and structurally tighter
- Interaction with the peak in the resource investment boom in Australia
“Although we expect Chinese growth to stabilise next year, the pace of growth we envisage is still only a touch above 8%.”
“Our Commodity Research team’s analysis of the Chinese construction cycle suggests that iron ore demand is likely to remain soft as core building demand falls, and that copper will receive a boost from the completion of new buildings in the next 6-9 months, but is likely to peak thereafter.”
Other targets from Goldman: S&P 500 at 1,450 in three months and 1,500 in six months.
They also lay out five growth-capturing strategies for the new year.
1) Stocks will outperform treasuries
2) Equities will beat credit returns, though not on a risk-adjusted basis
3) Cyclical sectors will beat defensive sectors — materials, industrials, information technology over consumer stables, telecom and healthcare
4) Double Sharpe Ratio stocks offer high risk-adjusted earnings growth and prospective returns. Here’s an explainer for the Sharpe Ratio explanation and the Double Sharpe Ratio, which includes estimation risk. Rocket science, for sure.
5) Stocks with high sales exposure to Brazil, Russia, India and China will beat domestic-facing firms.