By Mani 

As the financial conditions impulse points to sustained improvement in global growth momentum, Goldman Sachs places global growth for 2017 at the top end of the 3% to 3.5% average pace over the past five years. Jan Hatzius and colleagues published their “GS Macro Outlook 2017” report after collating a set of forecasts from Goldman’s economics team, and they predict that global growth will accelerate a bit further in 2018 as well.

GS turns pro-risk in asset allocation

The GS analysts anticipate that a lack of investment opportunities will remain an enduring challenge for investors in 2017. They point out that the financial conditions impulse has swung from sharply negative to modestly positive, both in the U.S. and in parts of the emerging world. The analysts believe that valuation levels for equities and bonds remain highly elevated by historical standards, and hence, they anticipate that returns will be low across most asset classes. They note that GDP growth has been witnessing sustained headwinds in recent years from the declining growth rate of the working age population.

However, the GS analysts believe the longer-term outlook could brighten next year. For instance, the analysts point out that the falling growth rate of the working age population is expected to decelerate in most countries over the next several years. In the analysts’ view, unless clear evidence points to an improved outlook for productivity and trend growth, the opportunity set for investors is likely to remain low:

Global Growth Momentum

In terms of asset allocation, the GS analysts turn pro-risk, as they expect the reflation trend to extend into 2017. Accordingly, the analysts remain Underweight bonds and are shifting to Overweight on equities and commodities over both three- and 12-month horizons. Elaborating on their view on equities further, the analysts anticipate front-loaded returns in the U.S., and they are OW Japan and the U.S. over three months, while they are UW Asia ex-Japan and Europe.

GS upgrades Commodities to Overweight

The GS analysts anticipate that credit spreads will compress further on the back of a supportive macro environment and gradual improvement in balance sheet fundamentals. On FX, the analysts believe the USD will continue to move higher over the next 12 months. Among the G10 space, the analysts prefer Sterling, EUR and RMB downside positions.

The GS analysts recommend Overweight positioning on commodities and long on enhanced GSCI. They believe the recent acceleration in global PMIs points to commodity markets entering a cyclically stronger environment. Accordingly, they have upgraded their GSCI returns forecast to +9.0%/+11%/+6.0% on a three-, six- and 12-month basis from -2.0%/+1.7%/+8.3%.