Whether you trust the squid and their thought process or believe in ‘better the devil you know’, Goldman’s top thinkers – from Garzarelli to Himmelberg and from Stolper to Hatzius and Wilson – lay out the top ten global macro themes from their economic outlook that will dominate markets in 2013. Agree or disagree, one thing is for sure – these ten ‘themes’ will impact us all one way or another and for each theme, Goldman discusses the wider implications for markets, and the potential issues and options for investing around them. Aside from the ten key themes, they provide succinct macro outlooks for rates (steeper curves and seniorty shifts), FX (moderate USD weakness amid broad stability), equities (accelerating growth and risk reduction underpin a solid 2013), and credit (‘search for yield’ has less to find).
Strawman – or investing bible – there is a little here every bull, bear, and arbitrageur…
Goldman’s Top Ten Key Themes (and our annotated summary):
1. Global growth: A ‘hump’ to get over, then a clear road ahead – The biggest challenge from a markets perspective is that we see risks to growth concentrated early in the year, with Q1 likely to show a step-down in growth globally. Fiscal restraint plays a major role in that story: we expect a big increase early in 2013, but a significant fading on both sides of the Atlantic thereafter.
2. More unconventional easing in the G4 – The danger of positioning for a weaker JPY is that a convincing shift may require the BoJ to ‘out-ease’ a committed Fed, which we do not expect.
3. Termites eat away at the foundations of the ‘search for yield’ – Even though we expect the search for yield to continue, the risk-reward is falling.
4. Housing stabilisation and private-sector healing in the US – While we see continued healing in the household sector and ongoing gains in both housing starts (20% growth in 2013) and home prices (2%-3% growth in 2013), this may now already be priced in by markets.
5. Euro area a smaller driver of global risk, but still a source of tails – The best opportunities to take directional exposure to Europe have come either when the market believes that the system is close to collapse (as it did again in May) or when there is confidence that the key risks have been resolved. Neither is true right now.
6. Continued divergence between core and periphery in the Euro area – The divergence in growth between the Euro area core (Germany in particular) and the periphery (Spain in particular) is set to continue. Periphery weakness is already well-known, but the potential for German overheating is a more distinctive theme.
7. EM growth pick-up revisits capacity constraints – if EM equities outperform DM in an absolute sense, the outperformance is unlikely to be enough given the higher risk or variance in outcomes.
8. EM differentiation continues – The ‘orthodoxy’ of the central bank reaction function to inflation is also likely to vary, and so the risk in some places is that even with building inflationary pressure, policy does not necessarily tighten.
9. Commodity constraint to loosen in the medium term – we expect oil markets to return to a more structurally stable position, where the ability to bring on new supply in the $80-90/bbl range is rapidly increasing.
10. Stable China growth, but not like the old days – iron ore demand is likely to remain soft as core building demand falls, and that copper will receive a boost from the completion of new buildings in the next 6-9 months, but is likely to peak thereafter.