Macroeconomics

Market Pulse October

15 October 2024 | 5 minute read
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As we trend towards a less globalized world and countries turn inward, we believe this amplifies the case for rethinking traditional emerging market strategies and that investors should consider separating their China allocation from the rest of their EM allocations.

Macro Views

China
China

The simultaneous cut of policy rates and RRR by the PBOC, relatively large magnitude of cuts, and unusual guidance on further policy easing indicated that persistent growth weakness in China has reached policymakers' threshold and the policy put has been triggered. These measures, as well as indication of incremental support to be delivered to the property sector, equity market, and consumer, as discussed in September Politburo meeting, add conviction to our economists’ forecast that sequential growth should improve in Q4. The potential for the US presidential election to lead to increased tariffs on Chinese goods in 2025 however remains a risk.

Euro Area Growth
Euro Area Growth

Euro area growth has slowed further, reinforced by a step down in September PMIs, signs of consumer caution, and persistent weakness in industrial production. With that said, our economists in GIR expect easing in the saving rate from its very high level and subsequently, a modest pickup in growth next year to 1.1%.

Monetary Policy
Monetary Policy

We see the FOMC’s 50bp cut in September as the right decision in light of recent inflation progress and risk of further labor market softening. Our economists have revised their forecast to accelerate the pace of easing next year, now expecting a longer string of consecutive 25bp cuts through June 2025. In the Euro area, we expect sequential cuts beginning this month until a terminal rate of 2.00% is reached in the summer of next year. In the UK, more aggressive cuts by the BoE may also be on the table as inflation news continues to improve.

Chart of the MonthChart of the Month

Bloomberg and Goldman Sachs Asset Management. As of September 24, 2024. Chart shows the difference between the 10-Year US Treasury yield and 2-Year US Treasury yield on a daily basis. “Pp” refers to percentage points. Past performance does not predict future returns and does not guarantee future results, which may vary.

Market Views

Large-cap Equities
Large-cap Equities

US large-cap equity valuations have remained extended by historical comparisons, but we believe these multiples can be maintained through 2025 due to 1) continued monetary easing, 2) post-election fiscal expansion, and 3) strong earnings and AI enthusiasm. Alternatively, European large-cap valuations have remained near 20-year averages, offering a more attractive entry point for investors seeking regional diversification while maintaining exposure to monetary easing and earnings strength also found abroad.

Rates
Rates

Receiving more compensation while taking on less interest rate risk is a rarity in fixed income markets, evidenced by the fact that the 2-Year US Treasury yield has been higher than the 10-Year yield on only 17% of trading days since 1976. Following roughly 568 trading days of an inverted 2s10s Treasury yield spread, the curve has begun to normalize. As the Fed continues to lower its policy rate, we believe curve steepening will continue and that core fixed income remains attractive.

Credit
Credit

US sovereign bonds offer better hedging potential and income than they have for most of the last 20 years. With that said, credit markets present a potential opportunity for more competitive total returns. We believe sectors such as securitized credit, mortgage-backed securities, and corporate credit are attractive as they offer higher carry, strong fundamentals, and relatively subdued default rates. An active approach may be the most effective way to manage credit risk, in our view.

Gold
Gold

Gold may be supported by 1) the tripling in central bank purchases since mid-2022, 2) attractive hedging value offered by the commodity, and 3) imminent Fed rate cuts as the opportunity cost of holding Gold, due to its lack of yield, declines alongside falling rates.

Asset Class ForecastsAsset Class Forecasts

Price targets of major asset classes are provided by Goldman Sachs Global Investment Research. Source: “Global equities gained 1.8%, China leads global returns.” As of September 30, 2024.

Decoupling China From Emerging Markets

In September, Chinese authorities announced new stimulus measures to support the economy and domestic markets, leading Chinese equities to experience one of their largest rallies on record. We believe this new easing announcement can support the Chinese stock market in the short term. That said, China still faces structural economic challenges and investors are increasingly recognizing the need to distinguish China from other emerging markets. The trend towards a less globalized world and countries turning inward amplifies the case for rethinking traditional emerging market strategies. We believe investors should consider separating their China allocation from the rest of their EM allocations.

China’s Market Rebound: Further Room to Go?Chinese equities have underperformed compared to other emerging markets, but recent fiscal and monetary stimulus measures, combined with low valuations, suggest a short-term rebound. As the government shifts towards pro-growth policies, the performance gap is narrowing. Looking ahead, this may present significant re-rating potential, particularly given low global investor positioning in China.
China’s Market Rebound: Further Room to Go?

Source: Macrobond and Goldman Sachs Asset Management. As of September 30, 2024.

EM Growth Divergence: Access to Stronger Growth FundamentalsDespite the new stimulus package, we continue to expect the growth gap between EM ex China and China to narrow further. In our view, this may be explained by 1) more favourable demographic dynamics outside China and 2) a shift in supply chains away from China and towards EM ex China countries. According to our estimates, EM ex-China is poised for stronger GDP growth than China in the long term.
EM Growth divergence: Access to Stronger Growth Fundamentals

Source: FactSet, Goldman Sachs Investment Research, and Goldman Sachs Asset Management. As of September 30, 2024.

Positioning for Growth: Exposure to the “Right” SectorsSplitting Chinese equities and other EM stock markets can also help achieve more precise sector allocation. Comparing the sector composition of China to that of the rest of EM, we observe important differences. MSCI EM ex-China has a much higher weight in IT compared to MSCI China. Given China’s substantial weight in the MSCI EM Index, a separate allocation to EM ex-China would enable investor portfolios to lean into this sector, providing attractive opportunities with growing importance on the back of AI.
Positioning for Growth: Exposure to the “Right” Sectors

Source: MSCI and Goldman Sachs Asset Management. As of August 30, 2024.

 

Source: MSCI, GS Global Investment Research, and Goldman Sachs Asset Management. As of September 2024. “We/Our” refers to Goldman Sachs Asset Management. The Macro and Market Views expressed may differ from those of GIR and other divisions of Goldman Sachs and its affiliates. The economic and market forecasts presented herein are for informational purposes as of the date of this document. There can be no assurance that the forecasts will be achieved. Past performance does not guarantee future results, which may vary. China’s Market Rebound: Further Room to Go? Section Notes: Source: Macrobond and Goldman Sachs Asset Management. As of September 30, 2024. Chart shows the MSCI China Index performance between December 2019 until now. It highlights both the rebound post-zero-COVID policy in December 2022 and the recent fiscal stimulus measures that have led to a rise in the index towards the end of September 2024. EM Growth divergence: Access to Stronger Growth Fundamentals Section Notes: Source: FactSet, Goldman Sachs Investment Research, and Goldman Sachs Asset Management. As of September 30, 2024. Chart shows the forward GDP growth differential between EM ex China vs Developed Markets (DM), and China vs DM from 2003 until now with 2025 and 2026 GS forecasts. It highlights EM ex China maintaining a larger growth gap over time compared to China. Positioning for Growth: Exposure to the “Right” Sectors Section notes: Source: MSCI and Goldman Sachs Asset Management. As of August 30, 2024. Chart shows a comparison in sectorial weight percentages between EM ex China and China, highlighting higher weighting in Information Technology for EM ex China and Consumer Discretionary for China.

 

The economic and market forecasts presented herein are for informational purposes as of the date of this page. There is no guarantee that objectives will be met. There can be no assurance that forecasts will be achieved. Please see additional disclosures at the end of this page. Past performance does not guarantee future results, which may vary. See the end of this page for additional disclosures.

Market Pulse October
The Market Pulse highlights the latest market developments and trends, coupled with insights on portfolio construction.
market pulse october
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