Summary: The team at Goldman Sachs private bank is fielding questions from US clients wondering if they should reduce their exposure to US equities. The bank predicts the S&P 500 could return 3% to 6% this year, compared to cash, which is earning 0%. The CIO’s view is that Fed tightening alone will not be the end of the bull market.
Key take-out: Goldman Sachs private bank is advising US clients, especially nervous ones, to keep up to 80% of assets in the US.
Key beneficiaries: General investors. Category: International investing, investment portfolio construction.
Goldman Sachs’ wealthy clients are increasingly asking Sharmin Mossavar-Rahmani, chief investment officer for Goldman Sachs private bank: Should I reduce my exposure to US equities? Her answer is still a firm “no”.
That can be tough for some clients to stomach, especially after six years of run-up in the stock market and expected rate rises parsed from amorphous Fed-speak. But Mossavar-Rahmani continues to advise that US clients keep up to 80% of assets here at home, exposure that’s been recommended since 2009. Her team predicts the S&P 500 could return 3% to 6% this year.
On a recent call with clients, Mossavar-Rahmani was quietly counselling clients on the historical performance of US equities at current valuations. From her office, with sweeping views of the Hudson River and the Statue of Liberty, she runs through the rationale. The S&P 500 is currently 16.8 times this year’s earnings estimate. Even though that is high by historical standards, in the 9th decile of their most expensive levels, she says, there is still a one-in-four chance that returns could be over 20%. That’s why, she says, “You need a lot of conviction before you shift your money into cash, that’s earning 0%, and we’re just not seeing it.”
Mossavar-Rahmani is similarly skeptical about the implications of Fed tightening. She expects the Fed to begin raising rates by mid-2015. “Whether it’s in July or September might impact traders and fast-money types but for our clients, with their long investment horizon, it is not relevant,” she says.
That view is also backed up by historical precedents. It could take a long time for the S&P to peak after the Fed begins raising rates, she says. The average is 18 months, between the Fed tightening and S&P top. Meanwhile, the shortest period is 1 month and the longest is 42 months. Also important to note: Since World War II, of the 14 Fed tightening cycles, eight have led to recessions, while six did not.
“That shows that Fed tightening alone is not going to be the end of the bull market,” Mossavar-Rahmani says. “You have to look at other factors like unemployment and the inflation backdrop.”
For six years, Goldman’s US-focused strategy has worked well. The S&P 500 is up more than 200% since the bottom, while smart shifts away from tumbling commodities, in particular oil and gold, and also emerging markets, shielded clients from big declines in their portfolios.
Mossavar-Rahmani is also making smaller “tactical” bets for clients, equivalent to some 8% of the total portfolio, which could add richer returns if they pay off and slowly tilt the clients’ US-heavy portfolios toward international markets, in the coming years.
Most of the picks play off monetary stimulus abroad, and, among the expected top performers, Spanish, Japanese and broadly European equities ranked highest. “Valuations in Spain and Japan, in particular, are in the bottom third of where they’ve been historically,” says Brett Nelson, head of tactical asset allocation at Goldman Sachs private wealth management. “This cheap valuation, coupled with the catalyst of ECB quantitative easing and positive economic growth, should result in higher returns.” Lending credence to this strategic Goldman play, was the ECB’s commitment to pumping $US1.16 trillion into the Eurozone, announced just last week. Stocks rallied on the news.
But there’s also good reason to be cautious. On Greece, Mossavar-Rahmani writes, “[Syriza, the anti-austerity party which won the Greek elections last Sunday (January 25)] cannot completely abandon the commitments of the [IMF, European Commission and ECB] without jeopardizing funding and an exit from the Euro would be devastating to Greece’s economy.” Her view is that Europe’s rising populist parties, including those in Spain, are unlikely to lead governments for any extended period.
But those are some pretty big ifs, still, and so we see her big-picture logic: For those with easily-jangled nerves, staying 80% in the US is still looking sweet.
This article has been reproduced with permission from Barron's.