US equities have returned nearly 300% since the trough of the global financial crisis, and now sit at historically high valuations. Sharmin Mossavar-Rahmani, chief investment officer of Private Wealth Management at Goldman Sachs, says that high valuations alone are not enough to warrant underweighting equities. What's important is context: she explains her optimism towards the US economy, as well as the potential risks to her views.
This podcast was recorded on January 10, 2017.
The views and opinions expressed herein should not be construed as an offer to buy or sell any securities and such views/opinions may differ from those of Goldman Sachs Global Investment Research or other departments or divisions of Goldman Sachs and its affiliates. This information may not be current and Goldman Sachs has no obligation to provide any updates or changes. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty, as to the accuracy or completeness of the statements or any information contained in this podcast and any liability therefor (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. Goldman Sachs is not providing any financial, economic, legal, accounting or tax advice in this podcast. In addition, the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by any Goldman Sachs entity or individual to that listener, nor to constitute such person a client of any Goldman Sachs entity. The portfolio risk management process includes an effort to monitor and manage risk, but does not imply low risk.
Copyright 2017 Goldman Sachs. All rights reserved.
This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This is exchanges of Goldman Sachs, where we discuss developments, shaping markets industries in the global economy, I'm Jake, seaward global had, of course
communications Here- Goldman Sachs, as
Two thousand seventeen begins. Investors are trying to position themselves for new opportunities and new risks,
it should be a year of transition for countries all around the world.
my guest today is for most of our Romani, the chief investment officer of private wealth management. Here, Goldman Sachs, she may
the case of new report. For U S echo?
an uncertain global and domestic backdrop. The report's called half full welcome, charming
So, since the trough of the global financial crisis you ve consistently
Consistently emphasised: U S, pre eminence the idea, the united?
states offers the best opportunities for investors.
And you ve advise clients to maintain a strategic, overweight, Dios equities, USA.
these have been more expensive than current levels, only ten percent of the time in the post war to era in the autumn,
I thought you continue to recommend staying the course. What drives the case,
your case for me
invested in yours equities. Even at these historic price levels, there are two factors that we focus on in terms of this recommendation
first the general economic backdrop, so we are looking at the: U S, economy that is grow,
and will actually have better growth rates and twenty seventeen than twenty sixteen, we look at all
their developed economies and, with the exception of the UK, partly driven by Briggs it, we expect broad based growth in other countries, so
generally favourable economic backdrop in developed economy.
in emerging market countries. We think places like Russian Brazil that we're in recent.
We'll have a modest recovery and we're
emerging markets, an aggregate, a modest improvement, so general
a very favourable economic backdrop. Then we look at policy from a monetary policy perspective and fiscal policy, and we think both will be favourable. Monetary policy will continue to be favourable
we're going to have basically negative real rates and most of the major developed economies
even in the. U S where the FED were Prob
please raise rates two to three times real rates adjusted for us
it will still be negative and that is based
The easy monetary policy, with the exception of the balance sheet
federal reserve. We think the balance sheet.
major economies that say like the easy, the European Central Bank or the biology the Bank of Japan will be increasing so generally continued supportive monetary policy on the fiscal side.
We are seeing a shift in sentiment. Austerity is out and fiscal stimulus is in so
it's in the: U S whether we end up with tax cuts or infrastructure.
Four or some blends. We're talking about fiscal stimulus in Europe were took my fiscal stimulus in Japan
so basically were an environment where fiscal stimulus will also be supportive. So when you
have an environment with a very favourable economic and policy backdrop that tends to be very good for equity. Specifically for U S equities the probable
of a recession is low, in our view, lets a fifteen percent in the U S and when
You have an economic expansion. The probability of positive returns is about eighty six percent, so very high with that kind of
file, why not stay invested in? U S equity, especially when we know that value
patient alone is not enough.
the indicator of going on
Wait equities! In fact, you could look at history if we were to go out of
please, let's say in the mid nineties, when you ask
equities entered what we call the tenth asylum evaluation to your point about being on me more expensive. Ten percent of the time one would have left just under two hundred percent returns on the table so
pretty significant? Now, that's not at all what you were expecting we're not expecting that kind of a bubble in? U S equities, but it's.
The very good warning that one should not get out of equities too early. So that
one major pillar for our view, and the second pillar is our theme of U S. Pre eminence we ve had a very,
strong view, since the trough of the financial crisis, that U s his prey,
in and the gap is widening, and with that backdrop, why not have your car assets in? U S equities and stay invested where there were two?
king, about the strength from an economic perspective, whether we're talking about innovation where there were took
about are indeed whether we're talking about immigration. Whatever factors we look at the gap,
the. U S and the rest of the world is actually widening.
even when we look at, for example, the oil sector to think about the? U S producing as much as now
ten million barrels a day. It's actually phenomenal oil and not
gas liquid, so it's pretty significant saw our view of. U S. Pre eminence also supports that argument. This recovery is the slowest regime,
World WAR too, but you also say what the recovery is lacking- strength its partially made up for its length.
So could you walk through some? The glass half full facts that give you conference about. The strength of this recovery are
who has been that from the
we'll financial crisis onwards. People have been too pessimistic about the United States and too optimistic about other parts of the world. Specially China. We ve had this theme that people.
Could history you look at the data, and people have had this view that all America's on
decline. We saw as the empire. Yes, we saw this in the Vietnam WAR. We saw this at the time of Sputnik. We saw this at the time of the rise of Japan
The ladys early nineties before they had their financial crisis. So this team has
heard many times and it occurred again in two thousand and nine, and our theme is when people are actually wrong about this decline of
the american economy or american power or the end of the american century that actually
was pre eminence, is not only intact, but the gap between the
Wes and the rest of the world is widening,
Actually had our outlook a few years ago, where we specifically went through everything from GDP per capita innovation we went
if so, many different factors to show how the gap is actually widening. You're looking at earnings per share those health of the financial system with ink
nobody leveraging. So when you think about you,
pre eminence and if you have a base case of it being intact that actually pushes us towards being more comfortable with? U S, assets for our clients. Some people point out that the Eu S working population is declining
there's a lot of external shocks that have prevented the United States from reaching a higher gear. Are you take on those
large. Those folks who are seeing the glass is half empty. So when people talk about all the concerns about this recovery, they will point to the fact that this recovery, since its trough, has been growing at about just a little over two percent and the average of all Post world war. Two recoveries has been about four,
so half the pace and we basically suggest people look at a number of factors and put this recovery in context. So one very important factor has been that after such a strong global financial crisis, whether it's the household, whether the financial sector, people have focused on very much improving the balance sheet, what's very unique about this recovery compared to recoveries in the post World war, two
The household has actually delivered and increase their savings rate and substantially improve their network relative to their income. So if you look at a chart of that, you could see how much more they have saved in this recovery versus past recoveries, where they actually have deceived. The same is true of the: U S economy in aggregate. So what has been somewhat unique about this report?
It is the extent of these leveraging that has occurred, and so that has been dragged one could say: that's a half empty or you could actually say that really half full,
The? U S! Economy is really well prepared to take any external shocks, so we think that, as people have built their balance sheets, specially households, they will start to spend more, so consumption should actually do much better going forward, given how much they have been. Saving for
the last several years. In addition, we do look. Demographics and people who talk about demographics. Being an issue are correct. Demagogic.
In the: U S are not as good as they are,
in the fifties and sick.
These and when we're looking at the size of the labour force growth rates, as well as the Labour force participation that has been dragged. In fact, there have been some very interesting studies that show, if you look at
recovery per number of person working in the labour force, it's actually being on par with other recoveries. So there's no doubt the demographics has been a factor
and there is a limited number of things we can do about demographics. The baby boomers retiring affects labour participation, there's not much. We can do about that. One thing that unique about the: U S, which was actually quite surprising, is that be prime age. Male participate
in the labour force is one of the worst in OECD countries. Only ITALY and Israel actually have worse numbers and part of that is the
limited training a lot of incarceration, and so that actually affects the participation of
So there's are some things. One can do improve to improve that, but this demographics is definitely part of the whole argument about secular stagnation that some of the more prominent economists have out there. You also talk, though, about the capacity for
their growth and productivity. What are some of the considerations that give you this optimism about productivity is a lot of the debate about secular stagnation has really focused on this lack of productivity growth early,
A few years ago, we pointed out where the term secular stagnation came from, and it came from of enhancing in the nineteenth thirties and interesting
enough. Even though people use the term a lot of enhanced
was actually proven to be wrong. He was very
negative about innovation. He was never
about demographics, any
there are no new markets to conquer and so we're gonna have secularist stagnation. Any was proven wrong. This issue of Productivity
has been debated for a long time. In fact, some of the more
a minute naysayers of productivity and the American
Declined were saying the exact same things in the early nineties, publishing books about
the decline of America even their eyes of Japan, and this
people are now talking about the decline in productivity.
What's incredible, is if you look at the history of productivity growth in the? U S, you see that it completely moves,
up and down in, let's see ten fish,
in your twenty, your windows, so you can have a window where
activities very high. Let's say about three percent: this is productivity growth or you can have attained
window words re low, like we recently had words just over one percent, some of them
might be real. Some of that could actually be due to miss measurement. In fact, our own colleague, yon haughtiness, has written a fair amount about what he thinks is
measurement in communications, information, technology, hardware and software, and if you think that there is Miss measurements,
for example, is our smartphone priced appropriately, given the huge improvements? Are we measuring that? In effect it's a deflationary factor, because you have so much
our capabilities, so much more fire power in that phone realities measuring the other devices to
Are we measuring that correctly and if we're not, then maybe real GDP is actually understated and he estimates the number is to be about zero point, seven percent, so that alone would change the perception of this recovery from people who say it's half empty to say no, it's actually have full. So that's very
and so both the productivity issue, as well as the Miss measurement issue, are two things where we looked at
We read a lot of very interesting academic papers- practitioners, one of their people,
quoted in the report is how variant from Google he's the chief economist there, and he has some terrific examples of why he thinks there's also significant Miss measurement in GDP because of all the impact of technology and the internet. So we ve got a custom,
in the United States to very low subdued inflation, people, don't worry about it very much.
Are there some risks to fiscal stimulus? At this point, if we see it here in the United States, as present electron has proposed, and how do you advise class repair themselves to the prospects of some inflation,
have had a view of disinflation for a very long time.
We, actually I don't see anything over the horizon that would make us concerned about inflation.
on a global basis. There is tremendous excess capacity, whether we are talking about labour and looking at the labour pool on a global basis. Whether we are talking about old,
me heavy industry or whether we're talking
but new economy there's a lot of excess capacity on a global basis.
So our view is that it's difficult to imagine any more
you're inflationary impulse from any sector. If you think about it,
should either there have to be an excess of demand and on again
We'll bases were concerned that there is a shortage of them on countries like China,
Assuming enough countries like Germany are not consuming enough and in terms of from a cost push perspective
Where do we have a shortage? Were anybody
incredible negotiating power to raise prices, and so an aggregate were actually not.
turn about inflation at all and we don't think interest rates would be rising rapidly. We think is going to be a very slow, gradual rise in interest rates.
There are risks. The glasses after all, have fall in you note in the report,
their merit of global risk. So what does the rest your most concerned about as we had in the new year? And you think?
there could be large enough to derail this recovery and the bull market. We think of risks in three buckets. We have the
probability high risk issues. We have low probability low impact than we have high probability but uncertain impact. So if we think of, for example, something like said tightening or the probability of a recession if they were too
but in terms of recession or very disruptive, fed tightening. That would be a
impact event, but we think it's actually
a low probability that the same is true, for example, of european populism. People talk about it. We think it's an issue,
We don't think that we're gonna have a major surprised
in Germany, for example, with the upcoming elections. So we think puppet
MS on the rise, is affecting the discussion, but it's not actually going to be something. That's gonna create a huge ray.
Andy Rail, the! U S recovery, then we have
the high probability but uncertain impact or no impact areas such as, for example, or the GEO political concerns. For example,
north korean belligerents, one afar extra
advise on geopolitical issues, actually had warned us as we are discussing the risks that every time there is a new,
president, either in the United States or in South Korea. The North Koreans do something provoke
if an here true to form and December Authority,
For us, there was announcement that they're going to be testing their intercontinental ballistic missiles and receive President Lech Trump tweeted right back. So there,
those kinds of things that will occur, its hiding
that will see these types of headlines, tensions
Middle EAST Cyber security issues,
terrorism here and there, but our base case is that
cannot anticipate a big cyber attack that could be higher
but our base case is that we're going to continue to see what we have seen for the last several years and then we have the cat
of high risk? High impact
greatest concern. There is China and our concern is to
one. Is China itself submerging under their debt burden and huge capital out
those and the other is in terms of trade, wars or geopolitical issues with the? U S, so the
would be areas where, if something were to happen, it could be a high impact.
A little bit more about China, you been a pretty outspoken critic of those who been overly optimistic about investing in China. So what are the red flag for you in China the same way, we think
people have underestimated the? U s we think generally people of overestimated China. If one steps back for a minute and when people make the comparisons between the two countries
their gdp may be large and the two largest in the world. But U S is one
richest countries in the world, its gdp per capita is the largest of any major country. China is one of the poorest
trees in the world, with some of the lowest gdp per capita of any
three in the world, and when we look
the issues their debt burden is huge and it's been
growing so rapidly the bank for internet
he'll settlements has an incredible measure. We think it's a very useful measure to look at its called the credit to GDP ratio.
gap. It shows how much credit relative to GDP
has been growing relative to its trend, growth and they have
of an elevated risk and a very high risk, the higher
Sk area is when that gap is over ten China at the second quarter of twenty. Sixteen was at thirty percent
and that's the latest data? That's available? U S went
the financial crisis in oh nine, when the number breach ten and was a twelve point, four percent. So if a country like
United States with this incredible wealth, highest gdp per,
happened, resilient economy, diverse economy, less
Export oriented, independent, another wrestler markets to open capital markets has a crisis. How can China avoid
crisis, where every country that has reached these levels of credit to GDP gap have
crisis Spain, Japan, the Uk
this data going back thirty forty years and so
our base cases that, if you look at that, exhibit at some point China is going to have a problem and we
It's this year or a couple of years from now. We think it's going to be an issue,
this year. We have a low probability, but sometime
over the next three years. In addition, they have significant capital outflows again, that's in sharp contrast to the: U S they ve had about one point,
we trillion dollars of capital outflows. The. U S is one
the largest sources of inflows of foreign direct investment.
people want to invest in the US and in terms of flows, it has had the largest flows between two thousand and eleven or two thousand and fifteen, and one of the largest stocks of
direct investments, so it has all the factors to help it
and yet the Eu S didn't avoid a financial
this is. Why does anybody think China will avoid such a crisis? So what mighta
hard landing mean in the United States if China were too whether its one,
two year, five years out have
an issue and not be able to withstand a new US, has very little direct exposure to
but how might affect the Eu S, markets and newest con me one of the things we ve
talkin about a lot. Actually, for the last couple of years is that if you look at the direct economic relationship with China
terms of, let's say, bank assets in terms of exports in terms of profits. It's actually very limited less than one percent so
in terms of bank assets, lending to China is less than one percent of bank assets. If we're looking at profits for corporate Amerika
it's less than one percent. So when we're looking,
These factors, exports are less than one percent of GDP, six tend to be more precise, so very negligible
and if that were the only factor, it should not have an impact, but through the financial CAN
nations index again something that the economic team at Goldman Sachs, his design. We actually do see impact because the market responds to the markets,
of the equity market were to drop significantly because of concerns.
by China. That's an indirect
way that would affect the USA would affect consumer confidence. It would affect see you.
confidence. It would affect capital expenditures, so it could have a market sentiment impact
we're, hoping that as time goes by and more and more investors recognise that, from a direct economic,
impact they should
be such a significant reaction that people would be better informed
Wouldn't overreact interesting enough last year, when China switched from Heaven
the dollar as the only reference point, they said they were going to look at a
ask in this isn't late: twenty fifteen early twenty, sixteen, the Essen p decline quite soon,
Secondly, and we had a lot of volatility in the market this time,
did the exact same thing at the end of twenty sixteen, and it was completely
by the market, so maybe
people are realising that actually from a direct perspective, they dont need to be as concerned about the
act of our hard landing in China. In terms of the U S, ears,
so some chance, given the new administration and some of the rhetoric in the campaign that relationships could sour over trade. You
tax some other issue that we haven't yet forecast.
concerned about the rejected the relationship between the US and China. Do you think it will work itself out
We look at the relationship there, so many areas where you
could have some heated tensions. You could
of heated rhetoric, it's not clear exists,
how China would respond to some of the trade actions.
They will react initially from everything. We know they will react in increments, but if things were to ratchet up
the? U S side in terms of trade issues, they would also respond in kind. We
also have obviously the South China Sea in theirs
who risk of an accident. There was an article about how close, for example,
airplanes have been over syrian airspace? U S mare play
and russian airplanes. While the same thing is happening in the south, China Sea we already so
incident with the drones, for example, so there is a risk there that things do get out of control
This case is that they will not that having a slightly tougher stance with China is appropriate, in fact, the council foreign relations published
interesting reports a little bit over a year ago, talking
but how they? U? S, really does need to rethink its strategy towards China, whether it's because
I bring security, whether because of military issues or whether, because of trade issues
and so there will be periods of rising tension, and we do think there will be bout of volatility in the marketplace, but
century things will work themselves out
You also mentioned the rise of populism in Europe and the potential for that to surface during the german elections. What are some of the signposts you and your team looking forward to see where your might be
dead and whether there is concern that it may take a dramatic turn
There are some areas we think will create some headlines, but maybe will not matter so. There's answer
about what happens in ITALY. Will they have some kind of
call for an election this year or the next, but with
turmoil that occurred in ITALY, with all the issues in the banking sector after wide of the mark,
it's become more immune to it, and it has less impact on the Eu S so that would be
uncertainty and we're thinking, probably not that important, we think
exit will be much more of a local issue is going to be a lot harder on the youth,
than any other part of the world
flooding, the? U S and the Euro zone, and we think that
was on, will take a very tough stance, because I dont want.
others in Europe to be encouraged to follow in the footsteps of the british government so than the reference
Then you're basically live with Germany. We don't think they're major issues there we think Chancellor Merkel we'll have a tougher election
but still overall, when we're looking at it, we don't think they're going to be any surprise is the one area where there is a small probability of a surprise would be in France but basis,
everything we look at and all the data it looks like the final candidates will end.
being somebody like Fiona Le Pen and the consumers?
says that fund would win, but obviously
People were wrong about breaks it and people were wrong about Donald Trump, but for everything we
understand: that's not the case in France. So, given this
drop you rat into down your return expectations for the next wonderful
years a little lower, basically because of
evaluations and a little bit increased uncertainty. You right in this report
compelling reasons why clients remain invested, despite that experts,
she of more modest returns. Why is that we ve had views about
modest returns now for several years to as valuations have gone up, we ve told clients that looking forward, we should expect lower returns. We probably something about this and twenty ten we published do something about it and twenty
a and just because one has lower returns expected doesn't
one should get out of the market? There are several reasons why this matters, first of all,
some upside? We actually have a higher probability to the upside, then the downside, so if that upside were to Madeira,
as people would be looking at reasonably attractive returns. Another arguing
is that there are not many good alternatives out there sitting in cash basically is going to
you, probably less than one percent return for the year bonds. We expect
where between zero and one percent returns, whether you're talking about short munitions,
or bonds Treasury bonds you're. Looking at very,
a modest returns. So when
looking at a clients core assets actually are highest expected return in terms of safe core assets. Would be? U S equities, we're not talking, for example, by emerging market
goodies, where we might have a slightly higher expected return, but a huge
of uncertainty and volatility, so one
Looking at core assets, our view is it's one of the best asset classes out there. We think there are some good upside for: U S, taxable, clients, we say the hurdle of having two
Pale. The taxes, state and federal taxes on your capital gains is pretty significant, so one has to be very cautious enemy
pessimistic to want to sell ones assets, pay. Taxes
realize all those capital gains and then read
said lower rate. One has to have a lot of conviction. So when we look at that range of things to consider our view is at its best to stay invested at this point,
she talked a lot about history in using history as a guide for investing decisions. Are there are now this periods in history that have helped shape your views for this year? The issue
of the decline of America is clearly
where you one does need to look at history and have historical perspective. So that's one example where we continuously ray
these issues that give people perspective. You would mention productivity
productivity is another very good example where you need historical perspective to see that productivity
moves in cycles and just because we ve
a ten year window with low productivity growth rates,
and tell you anything about what the next ten years can be like. So that's very important. We
about Miss measurement recognised.
that actually the bill
Labour statistics look at the data they realize they need to change. Our data is measured. They need to change how
p is measured. Then it evolves gives us a sense that we're not sing
something that is such an outlier. That may be there.
some miss measurement. So, in fact, history with
is a very, very useful guide. It may not exactly repeat itself, but we do war, nor clients that, if you hear- or this time is different, this is re special. This is different. That people should really have there
antennas up and be very cautious about that? Thank you sure mean
Provocative is always very interesting to have you and the programme. Thank you very much for having we take that can cause
this episode of exchanges of Goldman Sachs on Jake Seaward, thanks for listening, despite
ass was recorded on January tenth, two thousand seventeen view.
opinions expressed here and should not be construed as an offer to buy or sell any securities, and such views and opinions may differ from those of Goldman Sachs. Global investment, research or other departments are divisions of Goldman Sachs and its affiliates
this information may not be current and Goldman Sachs has no obligation to provide any updates or changes. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the statements or any information.
and in this podcast, and any liability, therefore, including in respect of direct indirect or consequential loss or damage, is expressly disclaim
Woman sacks is not providing any financial, economic, legal, accounting or tax advice in the spot cast. In addition, the receipt of this
cast by any listener, is not to be taken as constituting the giving of investment advice by any Goldman Sachs Entity or individual to that listener. Nor to constitute such person a client of any Goldman Sachs Entity. The portfolio risk management process includes an effort to monitor and manage risk, but does not imply low risk.
Transcript generated on 2021-10-14.