Goldman Sachs Downgrades 12-Month View of Equities to 'Neutral'

Goldman Sachs downgraded its 12-month view of equities to Neutral from Overweight, citing growth and valuation concerns. The bank's 3-month view of equities remains Neutral.

The bank also upgraded its 3-month view of commodities to Neutral, in-line with its 12-month forecast. The bank has an Underweight view of government bonds and Overweight on credit.

"Until we see sustained signals of growth recovery, we do not feel comfortable taking equity risk, particularly as valuations are near peak levels," said Christian Mueller-Glissmann of Goldman Portfolio Strategy Research.

"We continue to see valuations as expensive, particularly in Europe and the US and ex financials. However, not only are valuations high, but growth prospects look poor. Earnings have been consistently revised down across regions, with recent positive earnings surprises coming primarily because of a low bar. Until we see consistent signs of better earnings growth and higher inflation expectations, we believe equities will remain on a ‘fat and flat’ trajectory," added the analyst.

Discussing commodities, the analyst said, "We upgrade commodities to Neutral over 3 months, as we expect supply disruptions to drive higher spot oil prices and less negative roll yields in the near term. But we expect this to delay fundamental oil adjustments to the later part of 2017 and so any near-term backwardation will likely be temporary, in our view. Until the oil forward curve enters into sustained backwardation, as a result of fundamental adjustments, we refrain from being outright bullish as negative roll yield will likely continue to weigh on index investor returns. Consequently, we remain Neutral over 12 months."

Mueller-Glissmann added, "We expect the WTI oil spot price to be at $51/bl in 4Q2016, $50/bl in 2Q2017 and $60/bl in 4Q2017. We continue to expect industrial metals price weakness, owing to a combination of excess supply and weak demand, and have the view that the support from China will be temporary."

Goldman said it was remain directionally bearish on gold with 3,6, and 12 month targets of $1200,$1180, and $1150 per oz.

Commenting on FX, Mueller-Glissmann said, "We see near-term risks alongside a more dovish Fed than we had expected, but we continue to believe the USD will strengthen against the broader G10 currency complex over 12m, and be most pronounced against the euro and yen, given policy divergence between the Fed and the ECB/BoJ. In 12 months, we forecast EUR/USD at 1.05 and JPY/USD at 125. We scaled back our USD/CNY 12m forecast to 6.80, given the Fed and better China data than expected. We see good carry opportunities in EM FX, but choose selectively based on where imbalances have corrected more: we like being long MXN, INR and RUB."

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