Outlook and Recommendations from Goldman Sachs and J.P. Morgan for 2011

by Randy Smotone

 

Wall Streets top investment banks are bullish on 2011 based on the following:

  • Low rates - Easy fiscal and monetary policy
  • Better than expected growth in the US, with a substantial acceleration in real GDP growth over the next two years
  • Corporate earnings projected growth of 12%
  • Moderate inflation
  • Continued growth in emerging markets

Goldman Sachs is forecasting US GDP to grow by 2.7%, with a 1450 target for the S&P 500 and double digit returns, up approximately 15% from the 2010 S&P year-end closing price of 1257.

J.P. Morgan is forecasting US GDP to grow by 3.5%, with the S&P delivering at least a 15% gain, driven more by valuation expansion (risk premium falling) than EPS beats.

We will use the information provided by Goldman Sachs and J.P. Morgan as a starting point for our own analysis.  We will monitor these ideas throughout the year in the InvestSharp monthly newsletter and apply the appropriate strategies to match current market conditions.

 

Goldman Sachs

Goldman Sachs expects the combination of better than expected growth and moderate inflation at a global level to be positive for risky assets.  They cited clear downside risks--with the most important being post-crisis fiscal overhang, particularly in Europe.  Thus, policy risk could make risk-taking and entry of trades more difficult than usual.

GDP growth is expected to pick-up in advanced economies toward the end of 2011, led by the US and assisted by Canada, the UK and Japan.  A broader recovery is likely to put upward pressure on commodity markets and push global bond yields gradually higher.

Jobs outlook is expected to remain weak, with a projected unemployment rate of 9.25% by end of 2011 and 8.5% by the end of 2012.

Commodity forecasts broad pressure, mostly in oil, copper, soybeans and platinum.

The decline in the USD on a broad basis is expected to continue albeit at a slower pace.

US house prices are declining anew.  Baseline forecast assumes a drop of 5% over the next year, due to excess supply.

Overweight sectors: Technology, Energy and Financials

Technology - InvestSharp trade ideas: QCOM, IBM, GOOG, AAPL, MDSO, FFIV, ORCL, SWKS

Energy - InvestSharp trade ideas: USO, OXY, APA, EOG, COP, WLL, SLB, XOM, BBEP

Financials - InvestSharp trade ideas: KBE, C, WFC, JPM, HBAN, ZION

Underweight sectors: Health Care, Consumer Staples and Utilities

Other recommendations from Goldman Sachs:

  • Long US Banks, expected return 25%: Based on improving US outlook, stronger loan growth, declines in credit losses and gradually steeper yield curve should all be supportive.
  • Long Nikkei, expected return 20%: The Japanese equity market has underperformed other major markets.  The market displays significant 'beta' to the improving global industrial cycle.
    • InvestSharp trade ideas: EWJ, HMC, SNE, CAJ, DCM, NTT, TM, MTU
  • Long a Basket of Crude, Copper, Cotton/Soybeans and Platinum, expected return 28%: These commodities exhibit the largest supply constraints.
    • InvestSharp trade ideas: USO, JJC, FCX, PPLT, DBC and crude, copper, cotton, soybeans and platinum futures

 

J.P. Morgan

J.P. Morgan expects a more normalisation of corporate behavior, low levels of durables spending, ongoing strength in Emerging Markets and a very easy monetary stance will all contribute to a return above potential growth for the global economy by mid 2011.

The main strategy is being long assets such as Equities, Real Estate and Commodities.  Cyclicals are expected to keep outperforming in 2011.  They recommend long exposure in oil, copper, corn and wheat.

Gold and silver rallies should continue at a less pronounced rate.

Bullish on emerging market equities, particularly in Brazil and China.  They also like India and Turkey.

Constructive on Japanese equities in the financial and cyclical sectors.

USD is expected to continue to decline.

Overweight Sectors: Financials, Industrials, Energy, Materials, Technology, Discretionary

Financials - See InvestSharp trade ideas previously mentioned above

Industrials - InvestSharp trade ideas: FAST, EMR, CAT, JOYG, ITW, GE, PCAR, UTIW

Energy - See InvestSharp trade ideas previously mentioned above

Materials/Commodities - InvestSharp trade ideas: GLD, SLV, JJC, MCP, GMO, FCX, X, PPG, VALE, SWC, POT, CF, NLC, WLK, DOW, KS, IFF, LZ, HL, BTU

Technology - See InvestSharp trade ideas previously mentioned above

Discretionary - InvestSharp trade ideas: LVS, WYNN, GM, F, ANF, COH, SBUX, YUM, MHGC, MAR, CSTR, DIS

 

Note: Subscribers, please click on the link below to view our entire list of 2011 investment and trade ideas.

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