Investors who hope January’s rally in stocks portends a big year of gains ahead are going to have to dial back their expectations, according to Peter Oppenheimer, chief global equity strategist, Goldman Sachs.
The current rebound is a reaction to investors growing too negative at the end of last year, as US-China trade tensions, Brexit rhetoric, and concerns about global growth intensified, he said, speaking to Bloomberg TV from the sidelines of the Goldman Sachs Global Macro Conference Asia-Pacific in Hong Kong.
“That rally has got limits,” Oppenheimer said. “Fundamentally, we do expect quite a low profit growth over the course of this year across major equity markets, and that will cap the upside.”
The MSCI All-Country World Index has jumped almost five per cent this year, its second-best start since 2012, behind last year’s six per cent gain over the same period. That hot start didn’t endure, with the index slumping to an 11 per cent loss by the end of 2018.
Investors in 2019 should focus on two issues: First, whether the economic slowdown that markets have priced in actually emerges, or whether the data surprises to the upside. Oppenheimer expects the latter, seeing a slowdown especially in the US, though not as bad as feared.
Second is earnings. With companies in the midst of reporting their fourth-quarter results, guidance will be important, with investors also focusing on margins, he said. Consensus expectations in most regions are for these to expand through the course of the year, which is too optimistic and suggests earnings revisions will be pared, he said.
Still, companies that have posted disappointing earnings aren’t seeing much of a negative price action, which suggests much of that news has been priced in, he added. “This rally will continue for a little bit,” Oppenheimer said. Moderate profit growth “will support positive returns, but I think we’ll be in a more flattened, kind of skinny trading range for most markets over the bulk of the year,” he added. In the meantime, US stocks with highest exposure to the UK may get a boost if a Brexit deal is delayed, and the British pound pushes higher, Goldman strategists wrote in a note.