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US Preeminence
Sharmin Mossavar-Rahmani
Chief Investment Officer
Investment Strategy Group
Goldman Sachs
Brett Nelson
Head of Tactical Asset Allocation
Investment Strategy Group
Goldman Sachs
Additional Contributors
from the Investment
Strategy Group:
Matthew Weir
Managing Director
Maziar Minovi
Managing Director
Benoit Mercereau
Managing Director
Farshid Asl
Managing Director
2 01 5 O U T LO O K
Overview
investment views for the past six years and over this time we have
recommended clients maintain the core of their strategic allocation
in US assets. Since the global financial crisis, the United States has
outpaced major developed and emerging market countries and
regions across economic, financial and human capital dimensions.
With US equities now some 240% higher than their 2009 trough,
we have to ask: Has the investment theme of US preeminence
already played out?
We answer that question in the pages that
follow by examining key measures and showing
that the gap between the United States and other
major countries and regions has widened relative
to pre-crisis levels. The United States continues to
build on its strengths, ranging from immigration to
innovation, while many other key developed and
emerging market countries and regions are held
back by their structural fault lines, ranging from
demographics to governance. Our analysis shows
that the full scale of US preeminence has not yet
been fully factored in or discounted.
We believe that our six-year investment
theme will therefore endure for the foreseeable
future. We continue to recommend maintaining
a strategic overweight to US equities relative to
their share of global market capitalization. While
Outlook
2 01 5 o u t lo o k
Contents
SECTION I
US Preeminence
S E C T I O N I I : G lo b a l D ivergences
2015 Economic
Outlook
S E C T I O N I I I : N o t Y e t O u t t o Pas t u re
2015 Financial
Markets Outlook
34
48
36 United States
50 US Equities
40 Eurozone
54 EAFE Equities
42 United Kingdom
56 Eurozone Equities
43 Japan
57 UK Equities
44 Emerging Markets
58 Japanese Equities
60 Emerging Market Equities
61 Global Currencies
65 Global Fixed Income
73 Global Commodities
Outlook
SECTION I
US Preeminence:
Our Six-Year Investment
Theme Endures
Outlook
The US is the only major equity market above its 2007 peak.
Cumulative Return
Since 3/9/2009
Distance from
Pre-Crisis Peak
250%
244%
US
Eurozone
Japan
Emerging Markets
200%
40%
30%
32%
20%
10%
150%
136%
131%
126%
100%
0%
-10%
-20%
50%
-30%
0%
Mar-09
-28%
-24%
-29%
-40%
Feb-10
Jan-11
Dec-11
Nov-12
Oct-13
Sep-14
US
(Peak: 10/9/07)
Eurozone
(Peak: 6/1/07)
Japan
(Peak: 2/26/07)
Emerging Markets
(Peak: 10/29/07)
Outlook
US High Yield
171%
EM Local Debt
EM Dollar Debt
115%
97%
90%
65%
45%
40%
15%
-10%
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
8.1%
6%
4%
2%
0%
-1.1%
-2%
-2.2%
-4%
US
(Peak: Q4 2007)
Eurozone
(Peak: Q1 2008)
Japan
(Peak: Q1 2008)
The gap in GDP per capita between the US and others has
widened.
US$ thousands
8%
60
EM grows
faster
6%
ISG
Forecast
Thousands
US
Japan
Russia
50
4%
40
2%
30
0%
20
-2%
10
Eurozone
China
India
UK
Brazil
44.1
42.8
37.5
14.3
11.1
7.6
1.6
-4%
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
54.7
2000
2002
2004
2006
2008
2010
2012
2014
through 2014 while Chinas has risen an eyepopping 185%. Yet, given the substantially higher
starting level in absolute terms of US GDP per
capita of $48,000 in 2007, the gap in dollars has
actually widened relative to the Eurozone, Japan
and the BRICs, as shown in Exhibit6. As we have
noted in the past, under a range of reasonable
growth assumptions for the United States and
China, we estimate that Chinas GDP per capita
will not match that of the United States in this
century, even though its overall GDP may surpass
that of the United States in the next few years.
Looking to 2015, we expect the GDP gap
between the United States and key developed and
emerging market countries and regions to widen
further. We expect US growth to accelerate to
over 3%, while the Eurozone and Japan should
each grow at just below 1%. Growth in emerging
market countries in aggregate is expected to slow
down marginally.
What is striking about current US GDP
growth is that it is broad-based, with all major
sectors of the economy contributing to growth
relative to prior years. This breadth of recovery
across residential and nonresidential investments,
consumption and exports, along with an end to
the fiscal drag from the government sector, is not
being replicated in other developed economies.
For example, nonresidential investment bottomed
in the United States in 2009 and, according to the
Outlook
20%
30%
US
Japan
Eurozone
EM
China
15%
10%
20%
10%
5%
0%
0%
-10%
-5%
-20%
-10%
-30%
-15%
-20%
Dec-07
Mar-09
Jun-10
Sep-11
Dec-12
Mar-14
-40%
Dec-07
US
Japan
Eurozone
BRICs
China
Mar-09
Jun-10
Sep-11
Dec-12
Mar-14
US
Japan
Eurozone
EM
China
50%
40%
30%
20%
10%
0%
-10%
Dec-07
Mar-09
Jun-10
Sep-11
Dec-12
Mar-14
10
% GDP
3%
Change Relative
to 2007
10%
1%
7.7
8%
6%
-1%
Wider deficits
4%
-3%
2%
1.7
2.3
1980
1986
1992
1998
2004
2010
EM
Japan
Greece
Ireland
Portugal
Spain
Italy
France
Germany
1974
Eurozone
1968
US General
1962
-4.1
US Federal*
-11%
1956
0.8
-6%
Post-WWII Average
1950
1.4
-4%
Deficit
-9%
1.9
-0.1
-2%
-7%
3.1
2.2
0%
-5%
5.0
4.4
Outlook
11
Change Relative
to 2009
13%
11%
-2%
-4%
-3.5
-3.4
-2.8
-1.7
-2.4
-6%
-8%
US
Eurozone
Japan
EM
12%
0%
-3.3
-5.4
-7.0
-8.0
10%
9%
8%
-6.1
7%
Narrower deficits
-9.0
-10%
6%
5%
4%
3%
EM
-13.0
Japan
Ireland
Portugal
Spain
Italy
France
Germany
Eurozone
US General
US Federal*
-14%
Greece
-12%
2%
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
12
%YoY
mmb/d,
annual averages
3.5%
US
Eurozone
Japan
3.0%
2.5%
14
12
2.0%
11.7
11.6
10.6
10
1.5%
1.0%
0.5%
0.0%
-0.5%
-1.0%
US
Saudi Arabia
Russia
-1.5%
-2.0%
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
1980
1984
1988
1992
1996
2000
2004
2008
2012
Outlook
13
The US energy resurgence has been swifter and stronger than expected.
US equities now account for more than half of the global market.
Weight
United States
United Kingdom
Japan
Canada
France
Switzerland
Germany
Australia
China
Korea
Taiwan
Spain
Brazil
India
Russia
Eurozone
EM
Current
52.4%
7.1%
7.2%
3.6%
3.3%
3.1%
3.1%
2.5%
2.3%
1.5%
1.3%
1.2%
0.9%
0.7%
0.3%
10.2%
10.3%
-0.6%
-5.1%
-0.4%
14
Share
100%
US
Eurozone
Japan
EM
China
China Ex-Financials
200
150
96
90%
81
80%
70%
59
60%
50
50%
100
48
40%
Jun-09
Apr-10
Feb-11
Dec-11
Oct-12
Aug-13
Jun-14
Austria
Belgium
Greece
France
Ireland
Norway
India
South Korea
Aug-08
Brazil
China
0%
Russia
-50
Oct-07
10
0
UK
Spain
15
Germany
16
10%
US
17
20%
Italy
30%
50
Data as of 2013.
Note: Showing an equally weighted average of SOE shares of sales, assets and market values among
countrys top ten companies.
Source: Investment Strategy Group, OECD.
Outlook
15
US
Japan
Emerging Markets
Eurozone
China
As of Q3 2014
4.5
5.7
6.1
8.1
10.3
Data as of Q3 2014.
Note: Financial leverage measured as assets divided by shareholder equity.
Source: Investment Strategy Group, Datastream.
2007=100
US
China
Russia
160
Eurozone
Brazil
Japan
India
140
120
100
80
60
40
2007
2016
2043
2052
2061
2070
2079
2088
2097
2034
16
2025
Business Enterprise
R&D (% GDP)
US = 100
100
3.5%
90
80
3.0%
70
KOR
2.5%
JPN
2.0%
60
50
AUT
40
United States
France
Taiwan
Spain
Italy
Belgium
0.45%
United Kingdom
0.35%
Germany
0.25%
RUS
BRA
0.15%
10
Japan
0.0%
0.05%
CAN
Russia
TUR
20
FRA
South Korea
PRT
IRL
Mexico
0.5%
ESP
BEL
Brazil
CHN
30
USA
India
1.0%
GBR NLD
China
AUS
1.5%
Data as of 2011.
Source: Investment Strategy Group, OECD.
Data as of 2013.
Note: Based on PPP GDP per worker.
Source: Investment Strategy Group, The Conference Board Total Economy Database.
Outlook
17
The US ranks among the top countries for labor productivity and cost-competitive manufacturing.
18
US = 100
Q1 2006 = 100
130
390
125
Higher costs
120
121.1
115
108.6
110
105
100
95
100.0
111.0
122.7
123.3
124.3
US
Germany
France
UK
Japan
340
111.5
290
240
102.4
95.5
190
90
140
85
France
Belgium
Italy
Germany
Netherlands
Japan
UK
South Korea
US
China
80
Data as of 2014.
Source: Investment Strategy Group, BCG.
90
40
2006
2007
2008
2009
2010
2011
2012
2013
Outlook
19
History Is a
Useful Guide
Appropriate
Diversification
Value
Orientation
Appropriate
Horizon
Consistency
ANALYTICAL RIGOR
ASSET ALLOCATION PROCESS IS CLIENT-TAILORED AND INDEPENDENT OF IMPLEMENTATION VEHICLES
20
Ratio
1.4
1.2
ISG View
GIR View
4.0%
1.23
1.18
1.23
US Outperforms
Market Implied
3.5%
3.0%
1.0
2.5%
0.8
2.0%
1.5%
0.6
1.0%
0.4
0.5%
0.2
1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
2010
2014
0.0%
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Outlook
-1.0%
-1.3%
-1.5%
-1.7%
-2.0%
Cash
(3-Month)
2-Year Treasury
5-Year Treasury
10-Year Treasury
21
DXY
% GDP
170
100%
160
90%
150
+93%
80%
140
Forecast
Federal Reserve
ECB
BOJ
91%
70%
130
60%
120
50%
+46%
110
40%
100
30%
90
80
20%
70
10%
27%
19%
0%
60
1973
1978
1983
1988
1993
1998
2003
2008
2013
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Data forecast through end of 2016.
Note: ISG forecasts of central bank balance sheets. IMF forecasts of nominal GDP.
Source: Investment Strategy Group, Datastream, IMF.
22
%ann.
14%
12%
13%
90%
11%
80%
10%
10%
200%
Current
Decile
8%
8%
7%
6%
6%
6%
7%
176%
100%
150%
70%
60%
100%
50%
40%
5%
50%
30%
4%
20%
2%
0.4%
10%
5%
0%
0%
0%
1
Less Expensive
Valuation
10
More Expensive
-50%
-33%
Lowest Cumulative Price
Return Over 5 Years
Outlook
23
100%
90%
80%
70%
62%
60%
50%
40%
40%
30%
26%
20%
10%
0%
-5%
-10%
-15%
-20%
Magnitude of Loss
Data as of December 2014.
Note: Showing peak-to-trough losses within a year. Based on data since 1945 and conditional on being
in the 9th or 10th aggregate decile at the beginning of the one-year rolling window.
Source: Investment Strategy Group, Bloomberg.
24
Expected returns over the next one and five years are below historical realized averages.
18%
2015 Expected Return
16%
15
14%
12
12%
11
10%
8%
4%
1
2%
0%
-2%
6%
-2
13
13
12
10
10
9
7
-1
-4%
10-Year
Treasuries
Muni
1-10
US
Cash
Emerging
Market
Local Debt
S&P 500
Emerging
Market Equity
Hedge
Funds
US High
Yield
Bank
Loans
Euro
Stoxx 50
UK
Equity
EAFE
Equity
US
Banks
Japanese
Equity
Prospective Returns
Outlook
25
Beginning of
Fed Tightening
S&P 500
Peak
Recession
Begins
U-3 (Official)
U-6 (Broadest)
18%
16%
14%
12%
11.4
10%
8%
6%
5.8
4%
2%
0%
26
2007
2008
2009
2010
2011
2012
2013
2014
Outlook
27
28
Headline
Core
12%
10%
8%
6%
4%
2%
0%
-2%
1960
1966
1972
1978
1984
1990
1996
2002
2008
2014
Only Spain has been able to lower its unit labor costs since
the crisis.
2010 = 100
110
Hollande (2012)
Sarkozy (2007)
Chirac (1995)
Mitterrand (1981)
80
105
70
100
60
95
50
90
40
46
41
34
30
85
Germany
France
Spain
Italy
80
75
20
15
10
0
1
70
2000
2002
2004
2006
2008
2010
2012
2014
11
13
15
17
19
21
23
25
27
29
31
Months as President
Source: Investment Strategy Group, TNS Sofres.
Outlook
29
30
Outlook
31
32
Ebola Epidemic
Key Takeaways
In our 2009 Outlook, Uncertain But Not
Uncharted, we underscored the uncertainty
surrounding our economic and investment
outlook by stating that it was with a strong
dose of humility that we put forth our Outlook
for 2009. Today, we put forth our views with an
equal amount of caution. American economist
John Kenneth Galbraith said one of the greatest
pieces of economic wisdom is to know what you
do not know.31 This sentiment is worth repeating
today. There are many factors that will affect our
clients portfolios that are not knowable in this
environment.
Critically, we worry that in spite of all their
insights and expertise, monetary policymakers
in the United States, the
Eurozone, Japan and
China are unlikely to get
it right every time. The
Federal Reserve may be
too slow or too fast to
tighten, the ECB may be
embarking on quantitative
easing too little and too
late, the BOJ may be the
only arrow left in Prime
Minister Abes quiver and
China has to walk the
fine line between creating
enough stimulus to avert a
big slowdown but not so
much that it worsens an
already heavily indebted
credit profile.
Outlook
33
SECTION II
2015 Global
Economic Outlook:
Global Divergences
34
Outlook
35
Eurozone
United Kingdom
Japan
2014
2015 Forecast
2014
2015 Forecast
2014
2015 Forecast
2014
2015 Forecast
YoY
2.40%
3.00 3.75%
0.80%
0.25 1.00%
2.60%
2.00 2.75%
0.10%
0.50 1.25%
Policy Rate**
End of Year
0.25%
0.75 1.00%
0.05%
0.05%
0.50%
0.50 1.00%
0.10%
0.10%
End of Year
2.17%
2.25 3.00%
0.54%
0.50 1.00%
1.76%
2.00 2.75%
0.33%
0.25 0.75%
Headline Inflation****
Average
1.30%
0.75 1.50%
0.30%
0.00 0.75%
1.00%
0.75 1.50%
2.40%
Core Inflation****
Average
1.70%
1.25 2.00%
0.70%
0.50 1.25%
1.20%
1.25 2.00%
2.70%
1.00 1.75%
36
300
241
250
200
174
186
194
3.3
3.0%
150
100
3.5%
2.5%
88
2.0%
50
0
1.5%
2010
2011
2012
2013
2014*
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
The drag from fiscal cutbacks and tax increases has largely
run its course.
Percentage Points
0.5
0.3
0.0
-0.1
Forecast
-0.5
-0.8
-0.9
-1.0
-1.1
-1.5
-1.7
-2.0
2011
2012
2013
2014
2015
Outlook
Waning Headwinds
37
Financial Sector
Leverage Ratio
(Assets/Equity)
20
Household Financial Obligations Ratio
Average Since 1980
Financial Sector Leverage Ratio (right)
Average Since 1989
19
10.0
17
16.5
69
12
68
10
US Homeownership Rate
Average 196598
67
66
65
16
15
14
7
1980
70
13
11
18
Percentage Points
1985
1990
1995
2000
2005
64.4
64
63
62
1965
2010
1970
1975
1980
1985
1990
1995
2000
2005
2010
0
-5
-10
-15
1974
1979
1984
1989
1994
1999
2004
2009
2014
38
Thousands
% GDP
1400
Supply
Demand
1160
1200
8
7
6
1000
800
715
600
511
4.7
4
3.2
400
200
1
0
2-Year Average Household
Formation
Average 1984-2014
Household Formation
0
1985
1990
1995
2000
2005
2010
Energy Windfall
Outlook
Texas and other shale oil states account for a modest share
of US employment growth.
Average YoY Change
in Nonfarm Payrolls (mm)
4
2
0
-2
-4
Texas
Other Shale Oil States*
-6
Rest of US
-8
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Data through November 2014.
Note: Annual average of monthly YoY changes in nonfarm payroll employment, seasonally adjusted.
Source: Investment Strategy Group, Bureau of Labor Statistics, Goldman Sachs Global Investment
Research.
* Other shale oil states are Colorado, Montana, North Dakota, Oklahoma, Utah and Wyoming.
39
Percentage Points
Net Exports
Investment (incl. inventories)
Consumption
Total
0.7
0.00
-0.10
0.4
-0.17
-0.25
0.1
-0.50
-0.2
-0.75
-0.5
Q4
2014
Q1
2015
Q2
2015
Q3
2015
Q4
2015
Q1
2016
Q2
2016
Q3
2016
-0.70
-0.70
2012
2013
2014
2015
Estimates
Note: Estimates based on Federal Reserve FRB/US model by Goldman Sachs Global Investment Research.
Source: Investment Strategy Group, Goldman Sachs Global Investment Research, Federal Reserve.
40
% YoY
% of Polled
35
5
Headline CPI
Core CPI
30
26%
24%
23%
25
3
ECB
Target
2
1
0.7
0.4
20
15
10
5
-1
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
0
Jan-14
Popular Party
Socialist Party (PSOE)
Podemos
Mar-14
May-14
Jul-14
Sep-14
Nov-14
Outlook
41
Hollande (2012)
Sarkozy (2007)
Chirac (1995)
Mitterrand (1981)
80
70
60
50
46
41
40
34
30
20
15
10
0
1
11
13
15
17
19
21
23
25
27
29
31
Months as President
Source: Investment Strategy Group, TNS Sofres.
42
% YoY
6
ISG
Forecast
% YoY
10
Actual GDP
Potential GDP
0
-2
-1.9
-4
-4.2
6
5
-6
4
3
-8
-10
1
0
-12
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
1983
1987
1991
1995
1999
2003
2007
2011
2015
Outlook
43
11%
%YoY
%QoQ, SAAR
10%
Bloomberg Consensus
9%
8%
7%
6%
5%
Reserve requirement
rate cut, National
Development and
Reform Commission
(NDRC) accelerates
project approvals
"Mini Stimulus"
focused on
railways and
social housing
(MarJun '14)
44
Emerging Asia
Outlook
45
46
Outlook
47
SECTION III
Outlook
49
2014 YE
2,059
2,075 2,150
1 4%
2.0%
3,146
3,300 3,500
5 11%
3.7%
9 15%
6,566
6,950 7,150
6 9%
4.7%
10 14%
TOPIX (Japan)
1,408
1,550 1,650
10 17%
1.7%
12 19%
956
930 1,020
-3 7%
2.8%
0 9%
50
3 6%
300%
60%
250%
50%
200%
40%
150%
30%
20%
100%
10%
50%
0%
0%
-10%
-50%
-20%
-20%
-100%
33 37 41 45 49 53 57 61 65 69 73 77 81 85 89 93 97 01 05 09 13
-15%
-10%
-5%
0%
5%
10%
15%
Op. Earnings $130
Rep. Earnings $124
Trend Rep. Earnings $102
21 23x
18 21x
2,140 2,350
1,840 2,150
2,300
2,075 2,150
16 17x
1,630 1,750
1,750
Outlook
51
Probability
25%
35
31
30
20%
25
18
18
18
Feb-1966
Jun-1948
10
Nov-1980
10%
16
14
15
Nov-1968
15%
22
Current
Oct-2007
20
22
22
19
18
5%
Mar-2000
Aug-1987
Dec-1961
May-1946
40%
Jan-1973
30%
One Year Price Return of at Least
Jul-1990
20%
Aug-1956
0
0%
The rally has upside in both time and price to match historical
bull markets.
Years Remaining
1.3
0.4
3.7
Remaining Return*
71%
18%
87%
7%
6%
5%
Current/Last
5.8%
4.7%
3.8%
4%
3%
2.2%
2%
1.3%
1%
52
0%
Unemployment Rate
Inflation (YoY)
40
35
Price-to-Trend Earnings
Model Based on Macroeconomic Inputs
30
25
20
0
15
-1
10
All
With Recession
-2
-3
85
87
89
91
93
95
97
99
01
03
05
07
09
11
13
50
55
60
65
70
75
80
85
90
95
00
05
10
15
Data as of Q2 2014.
Note: Risk of equity bust (-20% drop) is calculated as an average for the following 5-9 quarters.
Source: Investment Strategy Group, Goldman Sachs Global Investment Research.
8
7
6
5
4
3
2
1
0
0
10
Outlook
12
53
60%
58%
56%
54%
29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89 93 97 01 05 09 13
Data as of December 31, 2013.
Source: Investment Strategy Group, Bureau of Economic Analysis.
40
30
24
20
21 19
11
10
China*
50
Philippines
52
50
Poland
Mexico
Brazil
Taiwan
Greece
Singapore
South Korea
UK
Spain
Italy
Japan
US*
Canada
Ireland
France
Netherlands
Germany
Belgium
Sweden
54
20%
350%
15%
100%
Average Return
14%
14%
14%
75%
300%
10%
9%
250%
5%
5%
200%
150%
4%
0%
100%
50%
2%
0%
-3%
Current
Decile
-5%
50%
25%
-4%
-10%
0%
Chinese Manufacturing
Wages
China Exports
Outlook
Less Expensive
Prices
Data as of November 2014.
Source: Investment Strategy Group, U.S. Bureau of Labor Statistics, CEIC Data, Empirical Research
Partners Estimates
0%
1
Valuation Decile
10
More Expensive
US Equities
UK Equities
Japan Equities
130
127
123
120
112
110
100
90
80
-90 -60 -30
30
60
90
55
Forecast
130%
Earnings Growth
100%
110%
5%
4%
4%
Multiple Expansion
2%
70%
40%
10%
3%
0%
2%
-2%
1%
0%
-4%
-20%
-22%
-50%
-6%
-8%
09
10
11
12
13
6%
14
Change in European
Margins (YoY)
Global Real GDP Growth
(YoY % - Right)
-1%
-2%
-3%
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Eurozone Equities:
In Search of Earnings Growth
56
% of Time Valuation
Less Than Current
61.1%
60%
100%
% Change Euro/US$
40%
Euro Appreciation
75%
62%
20%
5.1%
2.5%
-6.5%
4.2%
1.8%
0%
1.5%
50%
44%
-3.2%
-11.7%
-20%
-13.4%
-12.8%
Euro Depreciation
30%
25%
67%
34%
35%
United
Kingdom
Spain
16%
-40%
0%
-60%
-54.4%
2009
Italy
2010
2011
2012
2013
2014
Japan
France
Germany
Belgium
Outlook
57
Price to
Earnings Multiple
25
23.5
1,800
20.6
20
Koizumi
consolidates
power after
snap election
1,600
16.1
1,400
15
BOJ
announces
QE
Abe calls
for unlimited
easing
1,200
10
1,000
5
800
600
Mar-09
2012 Average
Japanese Equities:
Climbing the Wall of Worry
Dec-14
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
58
3.5%
3.2%
3.0%
2.5%
7
Dividends
5.7
2.2%
4.8
4.7
4.2
2.0%
1.5%
3.5
0.6%
3.4
3.6
2.9
1.0%
0.5%
6.5
Buybacks
6
2.0
2.2
1.2
0.4%
1
0.0%
GPIF
"Follow-on" Pension
Funds
Combined
0
2009
2010
2011
2012
2013
2014
Outlook
59
Composite Normalized
Valuations Since 1994
1.6
1.2
0.9
0.8
0.4
0.1
0.0
-0.4
-0.3
-0.2
-0.2
0.3
0.4
1.1
14%
-0.8
6.0x
12%
5.5x
10%
5.0x
8%
4.5x
6%
4.0x
4%
3.5x
Mexico (4.9%)
India (7.1%)
Indonesia (2.8%)
Brazil (8.9%)
Thailand (2.4%)
Korea (14.7%)
EM
Malaysia (3.6%)
Taiwan (12.6%)
China (21.8%)
-0.9
Russia (3.2%)
-1.2
6.5x
Net Profit Margin
0.5
0.0
-0.1
Financial Leverage
16%
3.0x
2%
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Data as of Q3 2014.
Source: Investment Strategy Group, Datastream.
Every major currency across all regions depreciated against the dollar in 2014.
2014 Spot Return
G10
EM Asia
0%
-10%
-20%
-12% -13%
-8%
-10% -9%
-6% -5%
EMEA
-19% -18%
-15% -13%
Latin America
-6%
-8%
-11% -9%
-13% -12%
-11%
-19%
-30%
USD
Appreciation
-40%
60
Peru
Brazil
Chile
Mexico
Colombia
Turkey
South Africa
Israel
Poland
Czech Republic
Russia
Thailand
Indonesia
Philippines
India
China
Korea
Singapore
Taiwan
Malaysia
New Zealand
United Kingdom
Canada
Australia
Switzerland
Euro
Japan
Norway
Sweden
Hungary
-46%
-50%
Forecast
91%
Federal Reserve
90%
ECB
80%
BoJ
70%
60%
50%
40%
30%
27%
20%
19%
10%
0%
Dec-03
Dec-05
Dec-07
Dec-09
Dec-11
Dec-13
Dec-15
Outlook
61
Z Score
Billion
250
200
3
150
Portfolio Inflows
100
50
1
0
-50
0
-0.7
-1
-100
Portfolio Outflows
-150
-2
-200
73
76
79
82
85
88
91
94
97
00
03
06
09
12
Jun-12
Sep-12
Sep-13
Sep-14
US Dollar
Euro
62
Outlook
Current Account
Foreign Direct Investment
Narrow Basic Balance
6%
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
04
05
06
07
08
09
10
11
12
13
14
63
275
10%
USDJPY
Average
250
5%
225
JPY
Depreciation
200
0%
175
-5%
150
-10%
125
100
EM Currencies
Undervalued
-15%
75
50
-20%
84
86
88
90
92
94
96
98
00
02
04
06
08
10
12
14
08
09
10
11
12
13
14
64
Bps
20%
40
17.2%
13.8% 13.4%
15%
10%
10.7%
7.4%
4.7%
5%
3.6%
30
2.5%
1.5%
1.3%
24
0%
21
20
-5%
20
19
US Inflation (%YoY) *
Bank Loans
US Treasury TIPS
EM US Dollar Debt
10 Year US Treasury
-10%
EM Local Debt
-5.7%
18
10
0
US
Italy
Canada
UK
Spain
France
Germany
Japan
Outlook
65
1.6%
12/31/2011
1.4%
12/31/2012
12/31/2013
1.2%
12/31/2014
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
US Treasuries
66
2.7%
2%
1.3%
1%
0%
-1%
-0.7%
First 2 Years
Last 3 Years
5 Years
Outlook
67
10%
9.3%
8.5%
20%
8%
6.0%
6%
Current Implied
22.7%
10.6%
4%
3.9%
10.2%
10%
6.5%
5%
2%
17.1%
15%
3.0%
10.5%
5.6%
1.9%
0%
0%
Current Market Implied Bottom-up Assuming Bottom-up Assuming Bottom-up Assuming
$70 Crude
$60 Crude
$50 Crude
Ba
Caa-C
Rating
68
75%
72%
53.4%
50%
25%
12.5%
55% 54%
50%
42%
33% 34%
30%
26.5%
24.4%
59%
54%
40%
24.7%
68%
60%
60%
58.8%
72%
72%
70%
20%
34%
26%
14%
18%
17%
16%
9% 8%
10%
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
Refinancing
1997
Low-Rated Companies
1996
1995
0%
0%
Outlook
69
Spread (bps)
2500
2000
5%
14%
4%
12%
3%
10%
1500
8%
1000
6%
4%
500
Average Return
16%
% of Time Positive
100%
75%
2%
50%
1%
0%
-1%
25%
2%
-2%
0%
0
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
0%
Inv. Grade Fixed
Income (IGFI)
High Yield
Bank Loans
70
Eurozone Bonds
-139
-173
-200
-224
-250
-226
-254
-300
-350
-344
-400
Germany
France
Italy
Spain
Portugal
Ireland
Outlook
71
80%
USD
EUR
JPY
10%
60%
7.6%
7.4%
5%
40%
20%
0%
0%
-20%
-40%
-5%
-5.7%
-10%
12/31/13
Commodities
underperform
-60%
-80%
03/31/14
06/30/14
09/30/14
12/31/14
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Last year extended the streak of lackluster commodity returns, with four out of five subcomponents declining.
S&P GSCI
Energy
Agriculture
Industrial metals
Precious metals
Livestock
-6%
-6%
-13%
-1%
-11%
20%
-34%
-45%
-8%
-6%
-4%
14%
Excess return*
-33%
-44%
-11%
-7%
-4%
14%
72
18%
16%
16%
14%
150%
China
World Ex-China
13%
12%
12%
10%
100%
11%
9%
50%
8%
6%
0%
4%
2%
2%
1%
-50%
0%
-1%
-2%
-2%
-4%
Copper
Aluminium
Tin
Current
-1%
-47%
-100%
Zinc (slab)
Steel
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
Data as of 2013.
Note: Data through 2012 for steel.
Source: Investment Strategy Group, Goldman Sachs Global Investment Research, Bloomberg.
mmb/d
96
Forecast
World Production
120
1.0
100
0.5
World Consumption
94
92
80
Risk of
continuing
oversupply
in 2015
90
60
0.0
40
Global Disruptions
US Crude Production
Brent Monthly Average Price (right)
-0.5
-1.0
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
88
20
86
84
Oct-14
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
74
US$/Ounce
$2,100
50
Gold Price
$1,900
Weaker USD
55
$1,700
60
$1,500
65
$1,300
70
$1,100
75
$900
80
$700
85
$500
90
2006
2007
2008
2009
2010
2011
2012
2013
2014
Outlook
75
Investment Demand
(% of Total Demand)
2014 US$/Ounce
Gold Price
(US$/ounce)
50%
$2,000
45%
$1,800
2,000
1,600
40%
$1,600
35%
$1,400
30%
$1,200
25%
$1,000
20%
$800
800
15%
$600
600
10%
$400
400
5%
$200
200
0%
$0
1977
1981
1985
1989
1993
1997
2001
2005
2009
2013
1,766
1,800
1,722
1,400
1,200
1,266
1,000
793
535
0
1871
1884
1897
1910
1923
1936
1949
1962
1975
1988
2001
2014
76
2 01 5 O U T LO O K
In Closing
Outlook
77
Notes
1. As measured by the Chicago Board Options
Exchange Market Volatility Index (VIX).
2. Menzie Chinn and Jeffrey Frankel, Will the
Euro Eventually Surpass the Dollar as Leading
International Reserve Currency? NBER Working
Paper No. 11510, August 2005.
3. Jeffrey Frankel, The Euro Could Surpass the
Dollar within Ten Years, VoxEU, March 18, 2008.
4. Barry Eichengreen, The Dollar Dilemma,
Foreign Affairs, September/October 2009.
5. Barry Eichengreen, Why the Dollars Reign Is
Near an End, The Wall Street Journal, March
2, 2011.
6. Andrew E. Kramer, Russian Warns Against
Relying on Dollar, The New York Times, June
5, 2009.
7. See for instance Carmen Reinhart and Kenneth
Rogoff, This Time Is Different: Eight Centuries
of Financial Folly, Princeton University Press,
2009, or Carmen Reinhart and Vincent Reinhart,
Beware Those Who Think the Worst Is Past,
Financial Times, August 30, 2010.
8. Investment Strategy Group, Questioning the
Role of US Assets in a Portfolio, July 6, 2009.
9. International Energy Agency, World Energy
Outlook 2012, OECD/IEA, 2012.
10. Ernest Miguelez and Carsten Fink, Measuring
the International Mobility of Inventors: A
New Database, World Intellectual Property
Organization, May 2013.
11. OECD, OECD Science, Technology and Industry
Outlook 2014, June 2014.
12. Ernst & Young, Adapting and Evolving: Global
Venture Capital Insights and Trends 2014,
January 2014.
13. For companies with a market capitalization above
$100 million in the Bloomberg World Index.
14. Dale W. Jorgenson, Mun Ho and Jon Samuels,
Information Technology and US Productivity
Growth: Evidence from a Prototype Industry
Production Account, Journal of Productivity
Analysis, October 2011.
15. The Heritage Foundation, 2014 Index of
Economic Freedom, November 2013.
16. World Bank, Doing Business 2015: Going
Beyond Efficiency, October 29, 2014.
17. McKinsey & Company, Prospects for Growth:
An Interview with Robert Solow, McKinsey
Quarterly, September 2014.
18. Henri Poincar, Science and Hypothesis, 1905.
19. These forecasts have been generated by ISG
for informational purposes as of the date of
this publication. Return targets are based on
ISGs framework, which incorporates historical
valuation, fundamental and technical analysis.
Dividend yield assumptions are based on each
indexes trailing 12-month dividend yield. They
are based on proprietary models and there
can be no assurance that the forecasts will be
achieved. Please see additional disclosures
Photography Credits: Page 28: PIERRE ANDRIEU/AFP/Getty Images; Page 30: DIMITAR DILKOFF/AFP/Getty Images; Page 31: ARIS MESSINIS/AFP/Getty Images; Page 32: JOHN MOORE/GETTY IMAGES NEWS/Getty Images.
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