Treading water before breaking the range

- "Lead indicators lost some momentum over the summer; the ISM has softened and the Euroland PMIs have started to come down from their highs. But arguably the equity market has moved to discount this ahead of the softening. Returns on equities have been on the weak side this year especially in the context of very strong earnings growth; the SXXP is up 5% year to date. We see a number of positives that should help support European equities in 2011:
1. We expect the US growth picture to improve modestly through 2011 and for concerns about a double dip to fade. Our US economists’ forecast 1.5% annualized GDP growth in 1Q2011 but by 4Q2011 they forecast growth of 3.0% annualized. The drivers of growth should also become more sustainable, US growth in 1H2010 was driven by inventories and fiscal policy whereas by end-2011 we expect more private sector demand. This more solid foundation for growth should ultimately stave off
fears of a double dip that have plagued markets for the last two years.
2. Loose monetary conditions: Our US team expects the funds rate to stay in a zero to 25 bp range through year-end 2011, as economic growth averages less than long-term potential rate and inflation continues to recede. They also expect the FOMC to resume unconventional policy easing – most likely by purchasing at least US$1 tn in Treasuries.
3. European economic growth remains robust. Despite the slight moderation in the survey data, the level of growth remains strong and there is evidence that the cycle is moving away from pure dependence on exports; in the last quarterly GDP breakdown, Germany and France saw a strong investment recovery.
4. Equities still provide attractive potential returns as the risk premium embedded in share prices remains high in our view. We expect some of this value to be realized through buybacks, increased dividends and/or M&A. Companies have strong balance sheets and plenty of firepower and increasingly those companies making strategic acquisitions are rewarded.
5. Earnings estimates have been revised up through 2010 and we also expect 2011 to be another strong year for earnings. Global growth on our economists’ forecasts remains high and companies still have catch-up growth to come through from the downturn, capacity utilization is still low in many sectors. We have updated our profit model and forecast 23% earnings growth in 2011 versus 16% for the bottom-up consensus.
- "Given this picture we upgrade – or probably fairer to say roll-on – our 12-month price target for the SXXP to 320 from 300. This would provide 23% price returns on European equities from the current level, 26%-27% including the dividend. We expect this to be driven by strong earnings growth rather than a rerating in the market, as is typical in this phase of a market recovery. It would still leave the market 20% off the highs in mid-2007."

Pension Solvency and the Long-End

- "Government bond yields fell sharply in August, contributing to a further easing of financial conditions. US 10-yr Treasuries reached our forecast of 2.5%, before bouncing higher. Valuations are now roughly ‘fair’, according to our Bond Sudoku model."
- "The prospect of further quantitative easing by the Fed, amid ongoing uncertainties over the trajectory for growth, argue against a quick reversal of the rally. But, based on our global macro projections, we think the cyclical trough for bond yields has already been seen. We forecast a steeper US 2s-10s curve than the forwards are discounting. We would position for a flattening of the 10s-30s Gilt curve against Germany. This ‘box’ spread has co-moved with the level of rates lately."
- "The rally over the past month was amplified by asset-liability management flows, particularly in continental Europe. We have commented on these dynamics in our weekly Bonds Snapshot publications. Here we present our updated Pension Solvency Indices, which help track changes in solvency positions through time and across regions."
- "Peripheral EMU markets have been volatile again, but the market has been much more discriminating than it was in May-June. Ireland is under pressure because of the contingent liabilities from banks. Portugal and Greece are suffering from growth concerns. But Italy and Spain are now participating in the rally. We have recommended long positions in 10-yr Italy vs. France, and in 30-yr Greek bonds, which already discount a substantial credit risk premium."

The new geography of global innovation

- The new geography of global innovation "While the United States and Japan remain leaders in innovation, increased competition from growth markets, notably China, suggests a changing landscape. Research and development spending in Asia surpassed EU levels in 2005, and is likely to overtake US levels in the next five years, thanks primarily to striking growth in R&D investment in China. Measures of R&D intensity, or R&D investment as a share of GDP, allow for cross-country comparisons of commitment to R&D. R&D intensity has remained flat across G7 markets during the last decade at 2.1%. In China it has impressively doubled as a share of GDP since 1999, reaching 1.5%, which remains low by international standards. R&D investment is driven largely by the corporate sector, which finances more than two-thirds of total R&D spending in many countries. Companies in a range of industries, from pharmaceuticals to technology hardware, have exposure to new hubs of global innovation."
- Pipeline concerns and the role of human capital "The new geography of global innovation is critically dependent upon higher education in science and engineering (S&E) fields. Student interest in S&E is low in G7 countries, suggesting that these markets are likely to have difficulty replacing an aging cohort of native-born scientists and engineers. Reliance on foreign-born skilled labor is set to rise further as the world’s S&E skill base shifts toward Asia, notably China, where S&E fields represent 40% of all new university degrees awarded (more than two and a half times US levels)."
- New geography demands a policy response "Innovation-led productivity growth in the G7 will increasingly require public policies which attract and retain skilled foreign students and workers. In the short term, a more flexible and talent-friendly immigration regime can help developed economies and companies to benefit from the globalization of S&E skills. Longer-term investments in R&D and science education can further enable G7 countries to remain competitive by rebuilding student interest in S&E fields and by expanding the domestic supply of skilled S&E labor."

If the US Sneezes...

- "Although our forecast for US growth has been more downbeat than the consensus for a long time—and remains so—our view on the rest of the world continues to be more optimistic. This kind of forecast appears to be in conflict with the popular notion that ‘if the US sneezes, the whole world catches a cold’. Nevertheless, we argue that it is plausible. All else equal, a significant US slowdown would slow growth to a degree in the rest of the world, and in some places more than others. But  espite the conventional wisdom, export channels are too small to transmit a US slowdown to a comparable degree. And while transmission through financial channels is arguably more capable of spreading a US slowdown, there are few signs currently of the kinds of pressures on financial conditions or stresses that would signal such an impact."
- "As a result, we continue to expect further divergence in growth and policy between the US and many others relative to what the market is pricing. And we have been recommending trades around that theme in recent months, particularly with respect to the emerging economies and the smaller G10. In particular, this gives us a bias towards widening rate differentials between the US and many others, further broad USD weakness and a preference for EM exposures in equities, both at the index level and within the major markets."
- "As our analysis here suggests, the principal risk is that a global shock acts to ‘connect’ the various economies more than we expect—either through financial markets, the banking system or some other new event. That is not what we expect, but it is this possibility, and not the fact of a US slowdown itself, that we think needs to be monitored."

China banks: Medium-term structural challenges

- China Financials Forum: Addressing medium-term structural challenges, opportunities "We hosted the Caixin China Financials Development Forum featuring policy makers such as NDRC/PBOC/CBRC/CIRC on Sept. 9, and the GS/Gao Hua China Financials Corporate Day on Sept. 10 to discuss interest/exchange rate reform, LGP loan risks, property tightening, insurance sector growth / regulation, rural finance and land reform outlook, and consumer protection."
- Interest rate reform: A med.-term challenge, not an imminent risk "Speakers highlighted the need to accelerate interest rate and exchange rate reform in the light of current negative real deposit rates. Key takeaways: 1) interest rate reform is a medium-term challenge for banks, but likely a gradual process rather than an imminent risk; 2) some NIM pressure on big corporates and mortgage loans is inevitable, but should be mitigated by: SME/other corporate loan/deposit spread rise; China’s already relatively low NIM vs. EM countries (e.g. Brazil, Indonesia, India, Turkey); and China banks’ low P/B vs. current ROE, which has partly discounted NIM decline risks, in our view."
- LGP loans: Not a systemic risk, but long-tailed on fiscal reform "Speakers underlined the rich resources, assets, and revenue collection rights of many Chinese local governments, but pointed out potential NPLs from highly leveraged LGPs. Municipal debt issuance will not happen for a while."
- Property tightening: Commercial property less a risk for now "Speakers believe commercial property risk is not a big issue so far given its early stage of sector development, low portion of rental vs. ownership, and property tax applied to reduce speculation, etc."
- Rural finance: Rural housing land reform to be trialled "Speakers believe rural finance should be viable given the high pricing power if risks are well managed. We believe rural housing land reform (piloted in rich areas) could have a significant positive impact on farmers’ personal wealth, consumption and financing activities."
- Insurance: Carefully managed pricing deregulation process "Speakers are positive on the growth potential of insurance. They believe regulators will maintain tight control on solvency margins, and life product pricing deregulation will be carefully managed to avoid any negative impact."

EM Equity in Two Decades: A Changing Landscape

- "Significant shifts in global equity markets: Over the next two decades, emerging equity market capitalization could increase substantially in absolute terms and overtake developed markets. The primary drivers are rapid economic growth and capital market deepening. China may exceed the US in market cap terms by 2030."
- "The EM landscape in two decades: Emerging equity cap could rise from $14tr to $37tr in 2020 and $80tr by 2030, bringing the EM share of global equity cap from 31% to 44% and 55% by these respective dates. The EM weight in the MSCI AC World index may also increase from 13% to 19% and 31% by 2020 and 2030. The BRICs’ share of world equity cap may be 30% by 2020 and 41% by 2030 vs. 18% now. For the N-11, the share could rise to 6% in 2030, from 5% now."
- "DM savings pools will need to own more EM: We estimate that developed market institutional asset managers currently hold 6% in EM equities within their total equity portfolio. This weighting may rise to 18% by 2030, implying net purchases of $4tr. The institutionalization of EM savings pools will also gather pace; this may help dampen EM equity volatility and valuation swings."
- "EM opportunities and challenges: EM equities offer investors attractive potential returns, but will require a greater allocation of business resources. Financial intermediaries have substantial revenue opportunities, but will need to localize further; operating costs and competitive pressures will rise."

Overwriting: adding alpha across Asia

- Overwriting has boosted returns on every Asia index since 2008 "A systematic strategy of selling monthly 1-mo 105% index calls has boosted returns across equity indices in Asia over the past two years. When coupled with a simple momentum filter determining whether or not to overwrite, returns have improved even further. The outperformance has been particularly significant on HSI, where systematic overwriters have outperformed long-only by 960bp annually since Jan 1, 2008."
- Slower-paced upside environment conducive to overwriting "While we remain positive on markets, we do not anticipate the explosive valuation upside that was experienced in 2005-07 and 2009. Instead, we believe markets will rise as earnings appreciate, which we expect to be a lower volatility, more gradual move higher and conducive to buy-writes."
- We screen for buy-writes: China Telecom, KB Financial, Canon "The additional returns from overwriting have turned many negative performing stocks into positive performers. On AEJ telcos, consumer, and utilities, for example, overwriters have outperformed by over 30pp since 2008. We screen for opportunities and find China Telecom, Canon, and KB Financial attractive buy-writes."

Funding update: ECB’s bank liquidity stays on max, periphery needs it most

- Full allotment extension is a positive "The ECB has opted to keep the full allotment stance on bank liquidity supply. This is important as a switch to a competitive auction would be unwelcome news for liquidity ‘have nots’, as we believe it would introduce scope for triggering a sharp increase in funding costs and hence bank COE for the European bank sector as a whole."
- Sharp fall in ECB use for the core’… "Not all European banks are in need of the ECB facilities. In fact, its aggregate use has fallen sharply, driven by a remarkable decrease in use by banks based in the European ‘core’. For these banks, we believe this trend will continue since:
1. Market rates allow for cheaper funding when compared to the cost of ECB facilities, both for euro and US dollar funding.
2. Funding markets have partly re-opened, with the amount of unsecured issuance picking up
significantly;
3. The deposit gap continues to shrink, structurally reducing the reliance on wholesale funding."
- … but the ‘periphery’ has no other funding options "In contrast, the reliance of the Greek banks on ECB funding continues to grow and now stands at the equivalent of 20% of sector assets (European ‘core’ at 1.1%). These banks continue to have limited access to the wholesale funding markets, with the ECB facility a critical funding avenue, the importance of which continues to grow. A switch from full allotment to a competitive auction would result in a spike in the cost of funding, adding further pressure on these institutions, in our view."
- Our preferred sector positioning "We recommend being positioned within the (few) banks that we expect to exhibit positive volume growth trends (eg Unicredit, Erste Bank), to benefit from structural change (eg Lloyds), while we recommend avoiding banks on the ‘periphery’, most notably domestic Spanish, Italian and Greek banks."

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

The ECB’s Role in Shaping the Future of EMU Policy Coordination

- "The Euro-zone crisis has illustrated that the existing policy coordination framework is insufficient."
- "We argue that, short of fiscal federalism, the ECB needs to play a greater role in enforcing policy rules."
- "We propose a simple system that would enable the ECB to adjust its haircuts on sovereign securities depending on the size of emerging imbalances."
- "Had such a system been in place, it would have raised funding costs and triggered warning signs for the crisis countries as early as in 2004, which could have led to earlier—and hence less severe—policy adjustment."

GoldmanSachs Global Economics Paper 20100831

The World is Down, But Far From Out

- "Welcome to our first Global Economics Weekly after the August break. We return to discuss the state of the world economy, our forecasts and our views on markets for the remainder of the year and beyond. During August, we saw unequivocal evidence of a significant slowdown in the US economy and, together with the already clear evidence of some earlier slowing in China, this has reawakened familiar fears for financial market participants. That said, we pinpoint here some key factors that should limit the downside for equities and other ‘risky’ assets."
- "Although the US economy will probably struggle for a number of quarters, we still think that a full-blow recession is not the most likely outcome. Moreover, US financial conditions are more important than the US economy for the rest of the world, and so the US policy response to the US economy’s ongoing sub-trend performance is more important than the US economy itself. If the economy performs as we forecast, we would expect fresh steps from the Federal Reserve to ease financial conditions."
- "In China, we expect further evidence of softening GDP growth but, in contrast to the US, this slowdown has been deliberately induced by tightening financial conditions. The evidence in recent weeks suggests that Beijing is moving to reverse these steps now that they have brought inflationary pressures under control. We forecast renewed strength in Chinese GDP growth in 2011, led by domestic demand."
- "Against a background of reasonable valuations and rather high equity risk premia, we think that once markets realise that the US is not likely to enter a full-blown recession and that China is going to strengthen, equity markets and risky assets in general will rally."

GoldmanSachs Global Economics Weekly 20100901

Raising our corn price forecasts

- Beyond near-term volatility we expect wheat prices to settle lower "Wheat supply disruptions continue to dominate the agricultural markets. Although wheat prices have retrenched from their recent peaks on improving weather, we expect prices to remain volatile until the market gains a better grasp on this year’s deficit. Barring further deterioration in crop production, we expect the elevated wheat inventories coming into this supply shock to push prices lower than currently priced in by the forward curve and forecast prices of 650 cents/bu over the next 12 months. Further, a potentially large supply response to higher prices in upcoming winter wheat crops suggests risk to this forecast is skewed to the downside."
- We are raising our corn price forecasts on tighter balances "For corn, continued strong demand over the past few months and prospects for wheat-to-corn demand substitution suggest even stronger corn demand than we had previously expected. While strong old-crop demand has lowered expected beginning stocks for the 2010/11 crop, our forecast of lower US corn yields also points to lower corn production in 2010/11 than the market currently expects. We therefore forecast the deficit that we have been expecting to widen further and are revising our corn price forecast higher to 465 cents/bu in 3 months, and 515 cents/bu in 6 months, leaving us constructive versus the forward curve."
- Ample soybean supplies will meet strong EM demand "Soybean prices have remained supported by strength in the rest of the grain complex and continued remarkably strong emerging market demand, in particular import demand from China. We believe that the expected record-large US crop and the prospect for another large South American crop will meet this strong demand and we continue to expect marginally lower soybean prices. However, an intensification of the nascent La Niña weather pattern would create upside risk to these forecasts as it has historically hurt yields in South America."

GoldmanSachs Agriculture Update 20100826

The Power of the Purse: Gender Equality and Middle-Class Spending

- Gender equality is improving "In the BRICs and N-11 countries, gender gaps in education, employment, health and political representation are narrowing. At the same time, laws and social norms that have discriminated against women are shifting in some countries. Together, these factors are giving women greater influence and decision-making power within households and markets."
- Women’s spending priorities are different "Women’s spending priorities differ from men’s, with women notably more likely to buy goods and services that improve the family’s welfare. Thus, as women gain decision-making power, household spending patterns are likely to shift. Household savings rates are also likely to rise. Sectors likely to benefit from women’s expanding buying power include food, healthcare, education, childcare, apparel, consumer durables and financial services. Our equity research analysts identify a list of companies with exposure to these global opportunities."
- Identifying the “sweet spot”: gender equality meets the global middle class "Improving gender equality coincides with the rapid growth of the “global middle class” (those with annual incomes between $6,000 and $30,000 in PPP terms). From about 1.7 billion people today, this middle class is expected to reach approximately 3.6 billion by 2030, of whom about 85% will live in the BRICs and N-11 countries. Over the next five years, the combined impact of growing gender equality and the emerging middle class will be seen most clearly in China and Russia, and to a lesser extent in Vietnam, Mexico, Brazil and Indonesia. In
the subsequent decade (2015-2025), these dynamics are likely to remain strong in Mexico and Russia, and to continue to strengthen in China, Indonesia, Vietnam, India and Philippines. India’s middle class will see rapid growth off a very low base, but the shifts in spending that we outline are likely to remain constrained by women’s relatively low status, at least for the next 10-15 years."
- Income and equality: a virtuous circle "Spending driven by women should support the development of human capital, which will fuel economic growth in the years ahead. At the same time, economic growth should continue to bolster gender equality."

GoldmanSachs Global Markets Institute 20100805

Current Accounts and Demographics: The Road Ahead

- "Demographics are a major determinant of long-term current account trends."
- "Countries with a high proportion of ‘prime savers’ (those aged between 35 and 69) are more likely to run current account surpluses."
- "We show how demographic shifts have influenced global current account trends in the past 30 years, and what they imply for the next 20 years and beyond."
- "We have seen some rebalancing from the extremes in 2008 but the process is not yet complete."
- "Demographic shifts point to a cleaner split between emerging markets (mostly in surplus) and developed markets (mostly in deficit) in the future than is evident in the current, more complicated picture."
- "Emerging markets (EM) could continue to lend to developed markets (DM) on average."
- "Demographic forces may help keep global real rates low."
- "The development of EM capital markets may be important in offsetting demographic pressures for capital flows from the EM to the DM world."

GoldmanSachs Global Economics Paper 20100812

Physical oil market tightening even as economic recovery softens

- WTI timespreads point to a tightening physical oil market even as oil prices slide on concerns over the economic recovery "WTI timespreads have largely recovered from the liquidation of speculative long positions in May, with 1st-60th month WTI timespreads rising as much as $10/bbl to trade between -$8.00 and -$10/bbl since mid July. Further, WTI timespreads remain resilient, actually strengthening by $0.11/bbl as WTI prices fell from $80.25/bbl to $75.39/bbl this week."
- Discharge of floating storage suggests that the oil supply-demand balance is in deficit, even as onshore inventories continue to rise "Recent shipbroker reports suggest that floating storage drew by 40-45 million b/d in June and July, to its lowest level in over 18 months. Using the more conservative estimate of the June-July discharge suggests that the draw at sea has more than offset the build on shore, which the IEA estimates at 21 million barrels. Consequently, we believe that total world inventories including floating storage declined counter-seasonally in June and July, even as onshore inventories continued to build, with oil demand exceeding supply by 600 thousand b/d on a seasonally-adjusted basis."
- Increased downside risk from US and Chinese economic policy "We continue to expect the WTI forward curve to flatten in 2H10, lifting prompt WTI prices into the $85-$95/bbl range that long-dated WTI prices have traded in since October of last year. However, the anticipated tightening of Chinese economic policy is having an impact on Chinese oil demand, with notable weakness in the recent July data. Further, US fiscal policy looks set to shift from a boost to a drag on economic growth, which led our US economists to revise down their 2011 US GDP forecast recently to 1.9% from 2.5%. While we anticipate that Chinese economic policy will loosen in coming months, and the US Fed will likely return to quantitative easing, the downside risk from economic policy in the United States and China to our WTI crude oil price forecast has increased."

GoldmanSachs Energy Weekly 20100816

Looking for clearer upside catalysts into year end

- Wheat has surged higher, but key commodities remain fragile "Commodity returns rose over the last month led by sharp gains in the agricultural complex owing to weather-related supply shocks in wheat. Additional key commodities also broke out to the upside of recent ranges in late July, driven primarily by a shift in policy tone in China, key financial uncertainties abating post European bank stress tests and the passage of US financial reform and generally positive corporate earnings, all of which boosted sentiment in risky markets. However, sentiment remains fragile and concerns about economic growth have dominated again in recent days, leading to some retracement across assets from multi-month peaks."
- Improved data will likely be required to sustain rising prices "Current soft economic data, combined with increasingly mixed signals from the commodity markets, is likely to continue to generate choppy commodity price action in the near term. In particular, although commodity demand indicators remain generally supportive, growth in Chinese implied oil demand fell sharply in July, observed oil inventories in the developed economies continue to build on a seasonally-adjusted basis and the decline in metals exchange inventories has slowed. While we expected some softness in 3Q2010, we believe that improvement in this data will likely be required before upward commodity price pressure can be sustained."
- We remain constructive on key commodities heading into year end "We maintain that high and rising emerging market demand levels against limited supply growth are likely to increasingly tighten balances, lending support to key commodities during 4Q2010. We expect upside to be greatest for crude oil, copper, zinc, platinum and gold. However, given market price action over the past month we are lowering our 12-mo returns forecasts for base metals to 15% from 25% and for agriculture to -10% from -1.0%. These revisions lead us to lower our 12-mo forecasted return for the S&P GSCI Enhanced Total Returns Index to 19% from 21.6%."

GoldmanSachs Commodity Watch 20100814

Demographic Dynamics: A case study for equity investors

- Demographic shifts offer robust investment opportunities "With the macroeconomic outlook still clouded, we turn investor attention to one of our core long-term departmental themes – namely, identifying and investing across demographic trends. We believe that we are sitting at the intersection of three powerful, once-in-a-lifetime population shifts, each of which holds material investment implications."
- Baby Boomers begin to retire "The approaching retirement of the Baby Boomers (born 1946-1964) will significantly alter the spending, saving and leisure patterns of the largest generational cohort in US history. The economic and financial effects will be far-ranging; we examine the investable consequences across the healthcare, financial and consumer sectors. We pay special attention to Allergan, Ameriprise, Brookdale Senior Living, Express Scripts, Financial Engines, McKesson, Mylan, Pfizer, T. Rowe Price and Zimmer."
- Investing in the “middle” "The Goldman Sachs economics team coined the notion of the “expanding middle” to describe both a global shift toward middle-income economies and the growth of the middle-class population within these economies. We see continued growth in consumer and infrastructure demand driven by the expanding middle and highlight Amazon.com, Banco Bradesco, Bucyrus, Citigroup, Hypermarcas, Monsanto, News Corp., Petrobras, Teck Resources and Visa as key beneficiaries."
- Generational waves after the Baby Boom "As Baby Boomers begin to exit the US labor force, generational dominance will shift in the United States for the first time in forty years. The rise of two under-30 generational waves—the “Millennials” and “Generation Z”—to
economic prominence will have significant consequences, particularly within the Consumer and TMT sectors. Companies exposed include AT&T, Crown Castle International, Disney, Hasbro, Juniper, Mead Johnson Nutrition, Progressive, Qualcomm and Urban Outfitters."

GoldmanSachs Portfolio Manager 20100804

Your 5-minute investment guide for Chinese equity markets: Aug 9 – 13

- "Chinese equities pulled back this past week, with MSCI China falling by 3% and CSI 300 by 1.5%. Market worries stemmed from slightly below expectation July macro releases and CBRC policy changes on moving trust instruments on-balance sheet, which is an incremental tightening move. Defensive sectors like consumer staples performed well onshore and offshore, while energy, financials, industrials suffered."

GoldmanSachs China Weekly Kickstart 20100813

Gold market poised for a rally as US real rates head lower

- Gold prices have sold off on lower speculative positioning … "After rallying to a record high in June, gold prices have declined on a selloff in speculative futures positions and gold-ETF holdings. Although the sell-off in speculative positions might not be surprising given the rise to a record-high price and decreased concerns over European sovereign debt, it stands in sharp contrast to the movements in US real interest rates, which have fallen to near-decade lows."
- … however significantly lower US real rates point to higher prices "Under our gold framework, COMEX gold market positioning tends to reflect US real interest rates, with low US rates driving a high level of net speculative length in gold futures. Consequently, the recent decline in gold net speculative length, even as 10-year US TIPS yields fall below 1.00%,
suggests that the gold market is now oversold, and we expect increasing speculative long positions to carry gold prices back toward our 6-month COMEX gold price forecast of $1,300/toz."
- Renewed quantitative easing measures by the US Fed would be an effective catalyst to drive gold prices higher "We expect the current low real interest rate environment to continue as our US economics team recently lowered their US growth outlook for 2011, with the implication that the US Federal Reserve will likely keep short-term US interest rates low through 2011. This should provide further upside support to gold prices and raise the upside risk to our current gold price forecasts. In addition, our US economics team also expects that the US Federal Reserve will return to quantitative easing measures in late 2010 or early 2011. We believe that a return to quantitative easing could act as a strong catalyst to carry gold prices to higher levels."

GoldmanSachs Precious Metals 20100812

Headwinds Blowing: Focus on Stable Growth/China

- Guidance not so conservative after all? "Given our economists’ recent downward revisions to their US and Japanese GDP forecasts as well as their outlook for persistent yen strength, we now anticipate a more muted earnings recovery and company guidance may not be overly conservative after all. Based on our revised JPY/US$ assumptions of ¥85 in FY3/11 and ¥90 in FY3/12, we now forecast TSE1 EPS of ¥43.4 in FY3/11 and ¥48.5 in FY3/12, representing 62% and 12% yoy growth, respectively, (versus our previous estimates of 73% and 20%)."
- Headwinds suggest more limited market upside "Using our revised earnings estimates, we now believe the market’s upside is more limited and our new TOPIX targets are: 850, 870, and 920 for the next 3-, 6-, and 12-months, respectively (from 900, 950, and 1,020 previously). The key positive risks to our outlook are a stronger US economy and a weaker yen."
- Highlight stable growth and China-exposed stocks "Against a backdrop of weaker US/Japanese growth, firm Chinese growth and a strong yen, we suggest focusing on our new basket of stable growth companies (i.e. GSSZSTGR) and China-exposed stocks (i.e. GSSZJPCN or GSSZCIND). Reflecting our more cautious near-term market outlook, we are raising our defensive exposure at the expense of cyclicals in our recommended sector weightings."

GoldmanSachs Japan Portfolio Strategy 20100811