Move over stocks, it’s time for investors to focus more on credit and commodities, according to Goldman Sachs strategists.
The Wall Street bank just downgraded global equities to neutral from overweight over a 12-month horizon, citing concerns over poor growth prospects and high valuations.
“Until we see sustained signals of growth recovery, we do not feel comfortable taking equity risk, particularly as valuations are near peak levels,” the strategists said in a note, dated Tuesday.
“Earnings have been consistently revised down across regions, with recent positive earnings surprises coming primarily because of a low bar,” added the team of strategists, which includes Christian Mueller-Glissmann, Jeffrey Currie and David Kostin.
Major global stock markets have put in lackluster performances so far in 2016. The S&P 500 index SPX, -0.06% is up just 0.2% year to date, which actually makes it stand out among overseas rivals — the Stoxx Europe 600 index SXXP, +0.18% has slumped 8.7%, while China’s Shanghai Composite Index SHCOMP, -1.27% is down 21%.
Goldman’s downbeat view on stocks echoes other Wall Street banks that see a painful summer ahead for stocks. Among key risk factors, other than weak earnings, are a potential rate hike in the U.S. and the U.S. presidential election.
On the flip side, the GS strategists see a better short-term outlook for the beaten-down commodity sector. They upgraded commodities to neutral on a 3-months basis, arguing oil prices are poised for a continued recovery because of supply disruptions. For West Texas Intermediate crude oil CLM6, +0.39% Goldman expects prices to rise to $51 a barrel in this year’s fourth quarter before climbing to $60 a barrel in the fourth quarter of 2017. The U.S. oil benchmark traded around $48 a barrel on Wednesday.
WTI and Brent LCON6, +0.08% are up about 30% since the start of the year on the back of a dovish Federal Reserve, data from China and supply shocks — for example in Libya, Nigeria and Canada.
However, the more upbeat outlook on commodities at Goldman Sachs doesn’t extend to gold GCM6, -0.15% The strategists said they remain “directionally bearish on gold” and expect to see prices fall to $1,150 an ounce over the next 12 months. That indicates a 10% slump from the $1,272 trading price on Wednesday.
Where Goldman gets really bullish is in the credit market, calling it its “key overweight” position.
“We continue to be overweight credit on both a 3- and 12-month horizon, given valuations appear cheaper than in equity and the carry looks attractive,” the strategists said.
“ECB credit easing and improving oil prices should be supportive to credit,” they added.
Within the credit space, the bank particularly likes U.S. high-yield bonds and European investment grade papers.