Goldman joins the bears on world equities

BONDS WILL outperform equities over the coming year as stagnating world economic growth knocks corporate profits, Goldman Sachs, the leading US investment bank, predicted yesterday.

Speaking at the bank's annual assessment of global prospects, even Abby Cohen, Goldman's notorious stock market bull, sounded a cautious note about equities.

Ms Cohen, who doggedly stuck to her upbeat 1998 forecasts for US stocks despite the recent turmoil, said she was not as "exuberantly bullish" as she had been in the past.

She said: "For most of the last year the [US stock] market has been roughly at fair value. [US] stock prices can rise in 1999, but at a more normal rate."

According to Ms Cohen, the resilient nature of the US economy means that US corporate profits will continue to rise next year, despite the difficulties in the global economy.

She said: "The analogy for the US economy is a supertanker. It may not be the fastest-moving, but it is among the steadiest."

Gavyn Davies of Goldman's, a highly-rated City economist with close links to the Labour Party, also warned that the remarkable rise in global stock markets in recent years was not sustainable. He said: "We are not going to get double-digit equity returns [in 1999]. If we do, we will start worrying about a bubble. If we see returns like in recent years, this will qualify as a major overshooting."

Mr Davies believes global equity returns will be around 5 per cent next year, while bond returns are likely to lie between 6 and 7 per cent.

Goldman's views are in line with many leading investment houses, where there is a widespread belief that the bond market now offers good value.

Also, as with many City forecasters, Goldman Sachs is gloomy about UK economic prospects. Little growth is expected in the UK stock market next year, and the UK economy is predicted to grow at just 0.5 per cent, significantly less than Treasury and Bank of England forecasts.

According to David Walton, chief UK economist, UK market analysts have been far too optimistic about the outlook for corporate earnings.

He said: "Analysts' earnings expectations are much too high at over 10 per cent. An outturn of zero is about the maximum likely. The UK equity market is forecast to trade sideways."

Mr Davies said this over-optimism about corporate profits was not confined to the UK, and predicted that growth in the OECD countries would slow from 2.2 per cent this year to 1.6 per cent in 1999.

World growth is forecast to remain unchanged at 1.8 per cent, largely because of recovery in much of Asia.

A devaluation of the Chinese currency or a drying up of credit lines to borrowers in Latin America or Central Europe represent the two biggest downside risks to the central forecasts, says the bank.

There are few global inflationary pressures, Mr Davies said, and there is even a risk of deflation - that is, falling prices - if central banks fail to respond appropriately to slowing growth.

This low inflation environment favours bonds, and Goldman Sachs predicts that bond yields will fall even further during 1999. Mr Davies said: "Our models do not indicate that a bubble has appeared in bonds. Bond yields could drop another 40 to 50 basis points."

On a sectoral basis, Goldman Sachs favours services and technology-based consumer and capital goods - media, telecommunications and information services number among the bank's favoured sectors.

Consolidation could produce "extraordinary gains" in financial stocks, while energy stocks are unlikely to do well, the bank said.

Goldman

says...

t World growth to stagnate

t US and UK to slow, Asia to recover

t Global bond returns to exceed global equity returns

t UK stock market to move sideways

t Interest rates to fall further

Start your day with The Independent, sign up for daily news emails
Sport
sportWWE latest including Sting vs Triple H, Brock Lesnar vs Roman Reigns and The Undertaker vs Bray Wyatt
Arts and Entertainment
Louis Theroux: By Reason of Insanity takes him behind the bars again
tvBy Reason of Insanity, TV review
Arts and Entertainment
Cassetteboy's latest video is called Emperor's New Clothes rap
videoThe political parody genius duo strike again with new video
Arts and Entertainment
tvPoldark, TV review
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Retirement Coordinator - Financial Services

Negotiable: Recruitment Genius: To provide a prompt, friendly and efficient se...

Recruitment Genius: Annuities / Pensions Administrator

Negotiable: Recruitment Genius: You will be the first point of contact for all...

Ashdown Group: HR, Payroll & Benefits Officer - Altrincham - up to £24,000.

£18000 - £24000 per annum + benefits: Ashdown Group: HR, Payroll & Benefits Of...

Ashdown Group: Learning and Development Programme Manager

£35000 - £38000 per annum + benefits : Ashdown Group: A highly successful, int...

Day In a Page

No postcode? No vote

Floating voters

How living on a houseboat meant I didn't officially 'exist'
Louis Theroux's affable Englishman routine begins to wear thin

By Reason of Insanity

Louis Theroux's affable Englishman routine begins to wear thin
Power dressing is back – but no shoulderpads!

Power dressing is back

But banish all thoughts of Eighties shoulderpads
Spanish stone-age cave paintings 'under threat' after being re-opened to the public

Spanish stone-age cave paintings in Altamira 'under threat'

Caves were re-opened to the public
'I was the bookies’ favourite to be first to leave the Cabinet'

Vince Cable interview

'I was the bookies’ favourite to be first to leave the Cabinet'
Election 2015: How many of the Government's coalition agreement promises have been kept?

Promises, promises

But how many coalition agreement pledges have been kept?
The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

The death of a Gaza fisherman

He built his own reef, and was fatally shot there by an Israeli gunboat
Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

Saudi airstrikes are fuelling the Gulf's fire

Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

The only direction Zayn could go

We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media
Young Magician of the Year 2015: Meet the schoolgirl from Newcastle who has her heart set on being the competition's first female winner

Spells like teen spirit

A 16-year-old from Newcastle has set her heart on being the first female to win Young Magician of the Year. Jonathan Owen meets her
Jonathan Anderson: If fashion is a cycle, this young man knows just how to ride it

If fashion is a cycle, this young man knows just how to ride it

British designer Jonathan Anderson is putting his stamp on venerable house Loewe
Number plates scheme could provide a licence to offend in the land of the free

Licence to offend in the land of the free

Cash-strapped states have hit on a way of making money out of drivers that may be in collision with the First Amendment, says Rupert Cornwell
From farm to fork: Meet the Cornish fishermen, vegetable-growers and butchers causing a stir in London's top restaurants

From farm to fork in Cornwall

One man is bringing together Cornwall's most accomplished growers, fishermen and butchers with London's best chefs to put the finest, freshest produce on the plates of some of the country’s best restaurants
Robert Parker interview: The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes

Robert Parker interview

The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes
Don't believe the stereotype - or should you?

Don't believe the stereotype - or should you?

We exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor