Asset AllocationNovember 20, 2014

Goldman on 2015: Predictions for the Year Ahead

Expect further divergence between developed economies and major (but risky) upside potential from emerging markets, the investment banking titan says.

Reported by Featured Author

Investors should be prepared for a year of low returns, according to investment bank Goldman Sachs.

In its outlook for the next twelve months, the Wall Street giant outlined 10 themes investors should consider, including increasingly divergent performances from developed economies and stronger performance by emerging markets.

“Our market outlook overall is quite benign,” the bank’s note said. “But, under the surface, it is striking that many assets are priced to offer low absolute rates of return over the coming years.”

Investors might be cheered that the bank also predicted low volatility would remain a market feature over the next year, but while this scaled back the likelihood of large downside hits, movements to the upside were likely to be rare too, the bank said.

Where upside could be captured, however, is in some emerging market economies, the bank said.

After a turbulent 2013, during which many of these countries were hit by the so-called “taper tantrum,” many economies were put into better order, Goldman Sachs’ note said.

“Two years on, emerging markets are likely to enter 2015 in better health—external imbalances have improved in several countries, with India, Thailand, and Chile among the stand-outs,” it said.

“Of the major asset classes, it is striking that emerging market equities now trade with earnings yields that are above their long-run averages. That on its own is no reason to own them. But for the first time in a while, we find ourselves thinking that they offer at least the possibility of significantly higher returns than developed markets over the medium term, even if they still offer significantly more risk,” the note said.

And if investors were advised to select their emerging market exposure carefully, the bank said they should also take care when choosing developed markets in which to place their faith.

“Divergence between the US and other developed market economies—particularly the Euro area—has already emerged as a key theme in 2014,” the note said, “and the gap between US growth and euro area growth (even adjusting for trend) is likely to remain wide. On an annual average basis, we expect that gap to widen.”

The note added that smaller economies within developed markets may become a focus for investors as local central banks—especially in Norway and the UK—may tweak economic policy before, or out of step with, their larger neighbors.