Fat & Flat; fertile for themes

- Action beneath the index "So far this year, equities have been disappointing. There has been plenty of action, but very little to show for it. The market has been stuck in what we describe as a ‘Fat and Flat’ range with wide sentiment swings driven by concerns about structural issues and macro data on the one hand, and a strong profit recovery and healthy micro supports on the other. Our sense is that valuation and strong balance sheets will win over investors and push the market out of this trading range late in the year, but we acknowledge that it may take some time for investors to get sufficient evidence to allay their fears. We forecast 260 on Stoxx 600 over 3 months and 280 in 6 months. The more sustained moves have occurred beneath the surface as stock performance has been dominated by a search for growth and the avoidance of domestically vulnerable companies. We expect the current environment to remain fertile for themes."
- Market discounting further economic weakness "The market seems to be discounting a significant slowdown in activity and further weakness in leading indicators. Fears about deflation abound, but the risks and comparisons with Japan are probably overstated. Nonetheless, our thematic views are consistent with weak domestic activity as a result of deleveraging. In this sense there are some similarities with Japan where globally exposed stocks outperformed domestic stocks after the bubble burst and strong balance sheet companies and those with high dividend yields performed well."
- Remain focused on EM growth, High yield and ‘stable growers’ "We remain long of EM and BRICs exposed companies (GSSTBRIC) relative to domestic and US exposed companies (GSSTDOME and GSSTAMER). We continue to favour stable growing, strong return companies (GSSTGRTH) and those with high yield and strong balance sheets (GSSTHIDY). We expect corporate activity will also be a key theme."

GoldmanSachs Strategy Matters 20100902

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