Goldman sees the outlook for global growth improving headed into the new year, and expects the slowdown that started early in 2018 to “end soon”.
That’s according to the bank’s year-ahead economic outlook which cites “easier financial conditions and an end to the trade escalation” as catalysts for an inflection.
“Although annual-average GDP growth is likely to rise only modestly from 3.1% in 2019 to 3.4% in 2020, this conceals a more pronounced sequential pattern of slowing growth this year and–in our forecast–gradually rising growth next year”, Jan Hatzius writes, adding that the flat yield curve may not tell the whole story, given the structural decline in the term premium and how untethered labor market slack has become from inflation.
(Goldman)
The bank’s take on recession risk is overtly less alarmist than that adopted by others. Indeed, Goldman goes out of its way to draw a distinction between their take and that of “some market participants”, who Hatzius says “worry that we are on an inexorable path to a hard landing”.
He cites the most recent version of Bloomberg’s survey which indicates that the median economic forecaster sees about a one third chance of the US economy sinking into recession sometime in the next year. And that’s probably understated, Hatzius reckons. “Economists are often reluctant to adopt a recession baseline, perhaps because of the career risk involved in crying wolf prematurely”, he writes, on the way to presenting Goldman’s view, which is based on a statistical model that “puts the risk of a US recession starting in the next 12 months at 20%”.
(Goldman)
The bank’s relatively sanguine outlook on the global economy does not, however, translate directly into an ebullient outlook for markets. Instead, Hatzius cautions that “after a long period in which profits and financial assets outperformed wages and the real economy, the next several years will likely see the reverse”. (Heaven forbid!)
Still, the bank’s expectation for a stabilization in global growth informs a half-dozen of Goldman’s best trade ideas across assets, including a call to stay long 10-year breakevens in the US with a 1.9% target and a stop at 1.55%.
“US breakevens still look cheap within the context of our fair value framework, where recent improvements in growth sentiment have been supportive”, the bank says. In addition, they note that spot inflation is still outstripping traded inflation, “which historically tends to result in some convergence”.
(Goldman)
As you might expect, part of the thesis revolves around the realization of tariff rollbacks, and as we saw on Wednesday and Thursday, the situation around the “Phase One” trade deal is still the very definition of “fluid”.
In addition to the breakevens trade, Goldman also sees global growth stabilization lending itself to an ongoing rotation towards cyclicals. That, in part, informs a Long EM equities call, which is also bolstered by valuations (current MSCI EM P/E of 12.4x is in the 85th %-ile vs history, the bank reminds you). They do recommend hedging that Long with something as simple as a March put, say, 5% OTM.
(Goldman)
Additional trades on the global growth stabilization story include Long commodities, Long Cyclicals vs. Defensives within EM stocks, and Long a basket of high yield EM credits.
The other 14 trades on the bank’s best ideas list include plays on the following themes: “Quality still on top”, “Fed to the sidelines”, “Don’t fight the ECB”, “Brexit breakthrough”, “go for carry” in EM FX, and a pair of “not done easing yet” trades in EM rates.
How accurate have Goldman’s calls been in the past?