Goldman strategists say bear market will continue in 2023, Asia stocks to outperform

Goldman’s strategists said the current gains are not sustainable, because stocks do not typically recover from troughs until the rate of deterioration in economic and earnings growth slows down. PHOTO: REUTERS

DUBAI – Equity investors hoping for a better year in 2023 will be disappointed, according to Goldman Sachs strategists, who said the bear market phase is not over yet.

“The conditions that are typically consistent with an equity trough have not yet been reached,” the analysts, including chief global equity strategist Peter Oppenheimer and senior European equity strategist Sharon Bell, wrote in a note on Monday. They said a peak in interest rates and lower valuations reflecting recession are necessary before any sustained stock market recovery can happen.

They estimate the S&P 500 will end 2023 at 4,000 index points – just 0.9 per cent higher than last Friday’s close – while Europe’s benchmark Stoxx Europe 600 will finish next year about 4 per cent higher at 450 index points.

The comments come after a recent rally – driven by softer United States inflation data and news of easing Covid-19 restrictions in China – that saw several global indexes enter technical bull market levels. The sharp rebound since mid-October followed a tumultuous year for global markets as central banks embarked on aggressive rate hikes to tame soaring inflation, stoking concerns of recession.

Goldman’s strategists said the gains are not sustainable because stocks do not typically recover from troughs until the rate of deterioration in economic and earnings growth slows down. “The near-term path for equity markets is likely to be volatile and down.”

The view echoes that of Morgan Stanley chief investment officer Michael Wilson, who reiterated that US stocks will end 2023 almost unchanged from their current level and will have a bumpy ride to get there, including a big decline in the first quarter.

According to his note on Monday, Mr Wilson’s clients have pushed back against his view of the S&P 500 falling to as low as 3,000 points in the first three months of next year – a drawdown of 24 per cent from Friday’s close. “What’s yet to be priced is the earnings risk and that is what ultimately will serve as the catalyst for the market to make new price lows,” he said.

Still, strategists are not all united about the fate of stocks after a volatile 2022. “Three double-digit rallies this year in the S&P 500 argue a case that as difficult as 2022 has been for equity markets, there is enough resilience to suggest that this year could be a harbinger of better times ahead,” Oppenheimer Asset Management chief investment strategist John Stoltzfus wrote in a note on Monday.

Meanwhile, Goldman’s strategists expect Asian stocks to outperform next year, with the MSCI Asia-Pacific ex-Japan ending the year 11 per cent higher at 550 points. Their peers at Citigroup turned more bullish on Chinese stocks, saying Beijing’s pivots on zero Covid-19 and property should lift earnings.

With the bear market still in full swing for now, Goldman’s Mr Oppenheimer and his team recommended focusing on quality companies with strong balance sheets and stable margins, as well as those with deep value and energy and resources stocks, where valuation risks are limited. BLOOMBERG

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