The global economy seems to hit its ‘peak momentum’
Moe, co-head of Asia macro research and chief Asia-Pacific stock strategist at Goldman, told analysts on Thursday that robust growth would be a “very encouraging backdrop” for profits.
“We’re very bullish on Korea,” said the Goldman strategist.
The investment bank has set a target of 3,700 for South Korea’s benchmark Kospi index, which is about 16% higher than its closing price on Thursday. The Kospi has already gained more than 10% this year and is one of Asia-best-performing Pacific’s markets.
According to Moe, one of the drivers behind Goldman’s view is South Korea’s “very significant” cyclical sensitivity to global economic recovery. This usually indicates that the market is more sensitive to the business cycle and performs better when the economy improves. In South Korea’s case, the country’s reliance on exports means it stands to benefit the most if the global economy performs well.
The outlook for most major economies around the world has improved significantly in 2021 compared to last year, as the pandemic’s aftermath fades.
“We’re looking for 7.2 percent in the United States, which is about a percentage point higher than the consensus, and we’re about a percentage point higher than the consensus for global growth… for the entire world economy this year,” Moe said.
It comes as more people in the United States, the United Kingdom, and other parts of the world get vaccinated against Covid-19.
Over the past week, the United States reported an average of 2.7 million daily Covid-19 vaccinations. According to the most recent official figures from the United Kingdom, more than 33.9 million people have received their first dose of Covid vaccination. That equates to at least half of the estimated population.
Still, there is a risk of a resurgence of infections.
In recent weeks, India, which appeared to have successfully kept the disease under control last year, has seen a second and deadlier wave. The South Asian country has seen record daily new infections for seven days in a row, and the official death toll from Covid-19 surpassed the 200,000 mark on Wednesday.
Another reason for the Kospi’s optimistic outlook, according to Moe, is structural changes, such as increased exposure to higher-growth firms in the so-called “fourth industrial economy” — a term commonly used to describe technologies such as artificial intelligence and the internet of things.
“All of that, combined with still reasonable valuations, gives us some pretty significant upside… for Korea,” he explained.
Where S&P 500 will be in a few weeks
According to Lori Calvasina, who heads the U.S. equities strategy at the bank, the market index will now reach 4,325 by year-end, up from her former estimate of 4,100. According to the latest prediction, the S&P 500 has around 3% upside from where it finished in April.
The strategist explained that the price target increase is due to the Federal Reserve’s plans to continue purchasing large quantities of Treasury bonds and asset-backed securities over the next several months.
So far this year, the S&P 500 is up 11.6 percent.
“We are now anticipating a 15% gain for the full year,” she wrote. “Our new price target now accounts for some minor multiple expansion commensurate with the Fed’s balance sheet expansion.”
For much of the past year, the central bank has been engaged in a massive campaign to use its emergency powers to keep markets liquid during the Covid-19 pandemic
It’s that massive influx of cash and easy monetary policy, Calvasina wrote, that should support market . RBC also updated its S&P 500 earnings per share forecasts to $187 for 2021 and $200 for 2022, up from $177 and $193, respectively.
The higher profit estimates factor in higher margins and stock buybacks, as well as a roughly 4% increase in the S&P 500’s effective tax rate in 2022 due to expectations that the Biden White House will pass a corporate tax rate hike.
“The signal that we are sending with these moves is that we see a little more room for stocks to rise higher this year, but that we also continue to expect a pullback or increased volatility in the market before the year is out, capping that upside,” Calvasina added.
RBC also shared its thoughts with clients on how President Joe Biden’s newly unveiled American Families Plan might affect various market sectors. The president unveiled the $1.8 trillion plan in late April, with hundreds of billions of dollars earmarked for high-quality child care, a national paid family and medical leave program, and other education programs.
Consumer staples and discretionary stocks would benefit the most if the administration’s plan was implemented as a result of direct investments in direct support to working families, such as universal preschool and two years of free college, according to Calvasina.
Financials and real estate investment trusts, on the other hand, may face headwinds from an increase in the capital gains tax for households earning more than $1 million, as well as increased regulatory oversight of account flows.