Abby Joseph Cohen, Goldman Sachs sees the S&P 500 at around 1,450 by year-end. “The forecast is that by year-end the S&P 500 could be at about 1,450 and that will be an increase of almost 20% for the year,” she adds.
According to her, the Federal Reserve has to think not just about what is happening in terms of the US economy, but what is happening globally. “Our view is that quantitative easing will continue probably through the middle of 2011 and the Fed will gradually reduce the liquidity that it has been providing.”
She further says, “For the US based investors, with whom I normally work, we think the best returning asset categories this year will be equities and commodities.”
Here is the verbatim transcript of her interview with Udayan Mukherjeeon CNBC-TV18. Also watch the accompanying videos.
Q: What is your expectation on the S&P 500 for 2011?
A: Our expectation is that the S&P 500 can perform quite well in 2011 It is the combination of good economic growth, strong corporate profits and a market which we think is underpriced at the start of the year. The forecast is that by yearend the S&P 500 could be at about 1,450 and that will be an increase of almost 20% for the year.
Q: What is making you so much more bullish than the street in the US because consensus estimates are a whole lot lower than Goldman Sachs both for the GDP target as well as for the S&P 500?
A: We think that the consensus GDP forecast is too low this year because we think that many other forecasters are not looking at the improved strength point within the dynamic of the economy itself. So for example corporations have been generating profits for the past few months they have been adding jobs, this to us is very important sign of future growth.
In addition we see that companies are investing very heavily in new business equipment which is also an indication of their confidence in the future. One other thing to keep in mind is United States is a very significant exporting nation and our exports have been growing 8-10% on annualized basis and this is something that also boosts our GDP.
Q: Would you classify this as a bull market then what we have seen for the last six-12 months and what you are likely to see in 2011?
A: This is a notable and sustainable recovery from the very difficult times in 2008 and early 2009. But let us remember that bull markets don’t only go in one direction. Bull markets are often interrupted. And we think the same thing is likely to happen here.
That is why we concentrate so much on fair value and the fair value is driven by our view on fundamentals. That doesn’t mean that there won't be any weakness along the way but we do believe that by the end of this year share prices will be notably higher than they are right now.
Q: What does it mean for the rest of the world because in 2010 while the US recovery was anemic and patchy, lot of the emerging markets (EMs) actually benefited from the capital, which was flowing from the US into markets like India as well? Now that you are saying that the US recovery will accelerate what could it mean for the rest of the world?
A: I think there are two ways to look at that question. I would like to start with the broader one which is the economy. If the US is doing better, all other things being equal, that is good for the rest of the world because in addition to being an exporting nation we are also the world’s largest importing nation and so if economic growth is good in US and demand is good that is something usually additive to the rest of the world.
The second part of the question has to do with capital markets, it’s very true that many investors were looking to invest in the developing world when the developed world was growing more slowly and some people have expressed a concern that money will come out of developing markets to go back to the more mature markets. I am not sure if that question is as simple as it is often stated. It’s very complex because I don’t think it is a zero sum game if the overall global economy is doing better because the US is.
The US market does better, by definition you don’t have to see money being withdrawn from the developing markets.
Q: Have you seen part of that process start already where people who might have been very sceptical about anaemic US growth might have had much larger developing market positions and might have been underweight in the US—has that turn started happening where people are recalibrating their US equity market positions?
A: We have seen some recalibration and it is important to recognise that American investors come in many different forms. For example, if you are talking about very active traders in the US, many of them did in fact say, in November and December, that they were willing to start looking back at US and some of the other developed markets. The very significant flows though into the developing markets over the last five years have come from active portfolio managers. It has also come from very large pools of money run by pension fund managers, endowments and so on and there the picture is a little more complicated but I think its worth discussing.
What happened when the developed market were not performing well over the last year or two, is many of these pools of money allowed their actual weighting in the developing markets to rise above target. What we are now seeing is that some of them are beginning to rebalance back to their targeted levels which are still dramatically higher that is their targeted levels for developing markets still dramatically higher than they would have been five years ago.
A: That is certainly possibly, I think we also have to watch very carefully very carefully in terms of the economic impact of improved growth in the US. And so for example if this improved growth enhances the economic activity in other economies and that itself could be helpful, again it is not a zero sum game.
Q: Having said that would you still say that maybe it makes for slightly lower inflows into developing markets this year than we saw last year?
A: That is certainly possibly, I think we also have to watch very carefully very carefully in terms of the economic impact of improved growth in the US. And so for example if this improved growth enhances the economic activity in other economies and that itself could be helpful, again it is not a zero sum game.
I also believe that we will see money coming from fixed income markets into the equity market.
So there again let us recognise that the source of investment capital can come from variety of different places, some could be coming from fixed income, some could be coming from different markets and some could be fresh money that is being generated by strong corporate profits.
Q: If your view is right that the US actually accelerates on its growth then what does it mean for the dollar because that’s what we map very closely in this part of the world as well with its strong correlations with commodities and other asset classes. Do you expect the dollar to strengthen in 2011 then if the US growth rebounds?
A: The house forecast for Goldman Sachs takes a look at many different currencies and the US dollar doesn’t seems to be terribly out of line right now and we believe that while the dollar could strengthen particularly relative to some currencies, we don’t expect dramatic moves. As we take a look at some of the currencies that seem to be pricing in very strong results, we would basically say perhaps the dollar yen relationship would need to adjust but we also think we will focus this year on the dollar renminbi that is the Chinese yuan. Upcoming we do think high level meetings between US and Chinese government officials and we would note that despite some of the political discussion the Chinese renminbi has been allowed to appreciate relative to the dollar by that 20% in recent years.
One final comment if I may and that is that the dollar responds to many things other than the US economy as the world reserve currency we have to recognise that there are many potential owners of dollars. I will give you one anecdote; Japan does good deal of its trade in the form of US dollars close to 40% and on that 40% only 10% is with the United States, the rest is with other nations that peg or semi-peg to the dollar and lets not forget that commodities typically are traded worldwide in terms of dollars. So when we think about the economic fundamentals underlying the US dollar we have to look much further than just the US economy.
Q: If US growth is indeed about to pickup, what it could mean for inflation because that’s the scare we sit with in India? What does it mean for US and global inflation if growth is indeed back?
A: We spend good deal of time looking at inflation and in our view it will take quite a long time for inflation to begin to rise to notable or concerning levels in the United States. Inflation has been running about 1.5% per annum and let’s keep in mind that business cost in the United States are dominated by labour costs so we need to watch is very carefully. But in the US we have had a very favourable trend as relates to worker productivity – it’s growing about 3% per year and so we can afford to pay our workers 3% a year without there been an inflationary impact.
So the bottomline for us is that in the US at least we don’t see inflation rising notably in 2011, we may start to see some rises next year. But right now we have a lot of slack, we have a high unemployment rate of 9.5% and realisation rate of our factories is low and this typically is not a good combination to generate rising inflation.
The inflation you mentioned in other countries is often driven by other factors and so for e.g. here in India and in some other important developing economies much of the rise in inflation can be attributed to things like the rise in commodity prices, energy and especially concerning in some countries on agriculture and food commodities. In the United States all commodities combined under 10% of total cost so we have a very different sort of equation when we look at the inflation outlook.
Q: Having said that do you have a constructive view on commodities through 2011, things like crude particularly?
A: We do have a constructive view on commodities. Our commodity research team have pointed out that thus far in this economic recovery globally industrial metals have been the standout and a good deal of this is related to structural demand particularly in developing economies such as India and China but other commodities have been lagging behind while its true in recent months that energy and agricultural commodities have been rising in price, we think those more to come especially for energy in 2011 and we think that will be response to a rise in global supply and demand.
Currently, crude oil is trading at about USD 88 per barrel (bbl) and we think within a year or two the trading range will be centred closer to about USD 100 per bbl but that's still dramatically below USD 150 per bbl that we saw before the financial crises.
Q: If your view is right that the US actually accelerates on its growth then what does it mean for the dollar because that’s what we map very closely in this part of the world as well with its strong correlations with commodities and other asset classes? Do you expect the dollar to strengthen in 2011 then if the US growth rebounds?
A: The house forecast for Goldman Sachs takes a look at many different currencies and the US dollar doesn’t seems to be terribly out of line right now and we believe that while the dollar could strengthen, particularly relative to some currencies, we don’t expect dramatic moves. As we take a look at some of the currencies that seem to be pricing in very strong results, we would basically say perhaps the dollar yen relationship would need to adjust but we also think we will focus this year on the dollar renminbi, that is, the Chinese yuan.
Upcoming, we do think, there will be high level meetings between US and Chinese government officials and we would note that despite some of the political discussion the Chinese renminbi has been allowed to appreciate relative to the dollar by that 20% in recent years.
The dollar responds to many things other than the US economy as the world reserve currency we have to recognise that there are many potential owners of dollars. I will give you one anecdote; Japan does good deal of its trade in the form of US dollars close to 40% and on that 40% only 10% is with the United States, the rest is with other nations that peg or semi-peg to the dollar and lets not forget that commodities typically are traded worldwide in terms of dollars. So when we think about the economic fundamentals underlying the US dollar we have to look much further than just the US economy.
Q: If US growth is indeed about to pickup, what it could mean for inflation because that’s the scare we sit with in India. What does it mean for US and global inflation if growth is indeed back?
A: We spend good deal of time looking at inflation and in our view it will take quite a long time for inflation to begin to rise to notable or concerning levels in the United States. Inflation has been running about 1.5% per annum and let’s keep in mind that business cost in the United States are dominated by labour costs so we need to watch is very carefully. But in the US we have had a very favourable trend as relates to worker productivity – it’s growing about 3% per year and so we can afford to pay our workers 3% a year without there been an inflationary impact. So the bottomline for us is that in the US at least we don’t see inflation rising notably in 2011, we may start to see some rises next year. But right now we have a lot of slack, we have a high unemployment rate of 9.5% and realisation rate of our factories is low and this typically is not a good combination to generate rising inflation. The inflation you mentioned in other countries is often driven by other factors and so for e.g. here in India and in some other important developing economies much of the rise in inflation can be attributed to things like the rise in commodity prices, energy and especially concerning in some countries on agriculture and food commodities. In the United States all commodities combined under 10% of total cost so we have a very different sort of equation when we look at the inflation outlook.
Q: Having said that do you have a constructive view on commodities through 2011, things like crude particularly?
A: We do have a constructive view on commodities. Our commodity research team have pointed out that thus far in this economic recovery globally industrial metals have been the standout and a good deal of this is related to structural demand particularly in developing economies such as India and China but other commodities have been lagging behind while its true in recent months that energy and agricultural commodities have been rising in price, we think those more to come especially for energy in 2011 and we think that will be response to a rise in global supply and demand. Currently crude oil is trading at about USD 88 per bbl and we think within a year or two the trading range will be centred closer to about USD 100 per bbl but that’s still dramatically below USD 150 per bbl that we saw before the financial crises.
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