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Equity outlook fourth quarter 2015
By Advisor Perspectives
The Committee upgraded our view on U.S. large cap equities following the recent correction, and maintained a slightly overweight view on European equities. Our view on MLPs has also improved following a challenging year.
U.S. Large Cap Equities
We upgraded our view of U.S. large cap equities to slightly overweight for the next twelve months. The S&P 500 registered its first correction since 2011, declining more than 10% from its high in May. The key question for investors today is whether the pullback represents a momentary pause in the current economic cycle, as in 2011, or anticipates something more serious, such as a global recession. In our view, the latter prospect is unlikely, given the resiliency of the U.S. economy and, importantly, broad policy commitment to cushion economic shocks. The Federal Reserve, in particular, is likely to be cautious in light of recent events and the absence of inflationary pressures as it assesses the timing and pace of any rate hikes.
Still, it bears noting that the past seven years have seen extraordinary gains in U.S. equities with a near absence of major (10%-15%) corrections. The recent swoon may be overdue, and actually healthy, as it creates more attractive valuations.
U.S. Equities: Corrections of 10% or More
Shading Indicates Bear Markets of 20% or More
Source: FactSet, Goldman Sachs. As of August 31, 2015.
Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.
Developed Market Non-U.S. Equities
Europe: The Committee as a whole remained at a slight overweight for Europe. Although growth and inflation forecasts for the region are subdued, the European Central Bank (ECB) stands ready to increase and/or lengthen its quantitative easing program as needed in support of its objectives. We anticipate that ECB stimulus will support European equities and maintain that there is more catch-up potential for the region from an economic recovery and earnings perspective.
Japan: Our view on Japanese equities moderated slightly from the third quarter. Japanese stocks are benefiting from a weak yen and reallocation of pension fund assets, but are threatened by a slowing Chinese economy. While we continue to believe that Japanese equities have upside potential, a contraction in second quarter GDP gives us concern about growth and the efficacy of Abenomics.
Emerging Markets Equities
China volatility, commodity weakness and dollar strength persist, creating headwinds for emerging markets equities, while corporate profitability remains under pressure. Against this backdrop we are maintaining our neutral view of emerging markets equities and believe selectivity from a regional/country and sector/company perspective remains paramount in today’s environment.
Brazil: With the country mired in recession, we have downgraded our view on Brazilian equities and further believe that the country may encounter meaningful risks with respect to its debt.
Russia: Russia has held up reasonably well in recent months compared to other emerging markets but Committee members remain cautious on the long-term outlook for the country’s equities due to a weak growth forecast, sizeable exposure to energy prices and the potential for ongoing geopolitical risk.
India: Thanks to some respectable policymaking and a solid fiscal position, India is hanging on to its position as a relative bright spot within our emergi