Global equities and bonds could retreat in the next three months, with stocks at risk of a brief sell-off, as rising inflation boosts yields, according to a quarterly strategy report by Goldman Sachs Group Inc.
The bank cut its rating on stocks to “neutral,” the equivalent of “hold,” for the next three months, a note to clients from its portfolio strategy group showed. Goldman Sachs also lowered corporate credit to “underweight” and predicted that government bond yields would increase.
“We are concerned that a sell-off in government bonds will lead to a temporary sell-off in equities in line with what we saw last summer, though the magnitude is likely to be smaller as the need for bond yields to correct is lower,” a group of 11 strategists, including David Kostin, Kathy Matsui and Peter Oppenheimer, said in the report known as the Global opportunity asset locator.
The MSCI All Country World Index dropped 8.8 percent from May 21 to June 24 last year, a period in which yields on 10-year Treasury notes rose to about 2.54 percent from 1.93 percent, data compiled by Bloomberg show.
The 10-year yield is now about 2.46 percent. Goldman forecasted it would rise to 3 percent by the end of the year and to 4 percent by the end of 2017.
“[Bond yields should rise because of] strong growth and an acceleration of inflation in the US; our expectation that, as the Fed concludes bond purchases in October 2014 and the macro outlook strengthens, the market will become more hawkish relative to the timing, speed and size of the Fed tightening cycle,” the strategists wrote.
US GDP is forecast to have expanded 3.3 percent in the second quarter, up from a weather-influenced 2.9 percent contraction in the first quarter.
GDP is expected to show growth of 1.7 percent for the whole of this year, then improve to 3 percent next year and for 2016.
The US consumer price index increased 0.3 percent last month after a 0.4 percent gain in May, according to figures from the US Labor Department, showing the economy is generating little price pressure as growth accelerates.
Goldman Sachs downgraded its three-month and 12-month corporate credit forecasts to “underweight.” There is less possibility of further spread tightening to offset rising government bond yields, according to the report. That’s especially true for investment-grade bonds, which already have the smallest spreads, it said.
While cutting its quarterly outlook, Goldman Sachs is bullish on equities over the longer term. The firm is “overweight” on global stocks on a 12-month basis, citing the potential for earnings appreciation driven by sustained economic growth.
Goldman’s quarterly downgrade came less than two weeks after the firm raised its year-end Standard & Poor’s 500 Index forecast. The benchmark gauge should climb 3.6 percent to 2,050 by the end of the year, as economic growth picks up, strategists led by Kostin forecast, boosting an earlier projection of 1,900.
Stocks with lower valuations would outperform the market before the Fed begins tightening interest rates, the strategists wrote. Goldman Sachs’s year-end projections for the Standard & Poor’s 500 Index next year and for 2016 remained unchanged at 2,100 and 2,200, respectively.
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