At a Goldman Sachs briefing in London there was optimism about the bull, but fears of volatility and China remain, writes Mert Acikgoz
As we all know, for close to nine years, the US economy has been in an almost surreal bull market which now has some investors worried and thinking about going underweight in equities. ‘Surely, it can’t continue,’ runs the mantra, to the sound of money coming out of shares and into alternative assets.
But is it too soon to panic? Well, who better to ask than Goldman Sachs. Fortunately, the institutional giant this week released its updated analysis of 2018 entitled (Un)Steady as She Goes: this, with all the authority you’d expect from such a great name, contains surprisingly upbeat analysis about the current condition of the global economy, although it does list possible factors which might derail this stability; from bitcoin to Trump, rising populism, and the possibility of a trade war with China.
But as worrying as some of the headwinds are, the conclusion is surprisingly rosy: the collective impact of the unsteady undertow factors is not powerful enough to upset the economy, in the opinion of the report’s authors.
So here’s the good news. For 2018, the global GDP growth rate is expected to accelerate to 3.4 per cent from the 3.2 per cent of 2017. This growth is largely based on the slightly higher growth rates in the US and in the developing regions of the world which more than balances the weaker growth in regions like Japan or England. The report also shows a low possibility of recession in the US at 10 per cent. Much of the report displays a hard-nosed ability to see past the tweets and look to the cheering facts.
There was more good news. Earnings before interest and taxes (EBIT) reached their highest levels in more than a year in the US, with over 75 per cent of the S&P 500 companies earning more than predicted. Additionally, the report claims that we have been in a low inflation and low inflation volatility regime since 1997 and will remain in it for years to come. This is reflected in the low and steady inflation rates of the Eurozone and Japan. Despite the increase in US inflation, G7 inflation remains very low historically. Jeremy Corbyn might be distressed to learn that we’re nowhere near the 1970s.
Even so, there were harsh words for cryptocurrencies which — in the opinion of the bank — have bubble characteristics which far outstrip the 1600s Dutch tulip mania: in the tulip crisis of 1637, prices for the flower rose 485 per cent.
Digital currencies outstrip this alarming example: for instance, bitcoin rose 2,292 per cent, peaking in 2017. Following this massive rise, bitcoin recently fell 64 per cent. It experienced a similar fall in the period from June to August in 2011 when it fell 69 per cent: but crucially, that represented an insignificant $20 drop whereas the recent drop is a loss in value of $12,792. This shows how digital currencies could cause massive disruptions in the market.
Furthermore, as technology becomes more prominent in every aspect of life, so do the vulnerabilities it brings with it. The possibility of cyber-attacks is one factor that the Sachs report considers a potential threat to the economy. Cyber-attacks in the past have caused billions in damages in cases like the Yahoo hack in 2013 and the WannaCry attack on the NHS in the UK this past year. Costs of these attacks will probably increase in the future as life becomes more dependent on technology and criminals gain access to more tools. But so far they have had little effect on economic growth and financial markets.
But perhaps the most surprising aspect of the report is the emphasis it places on China. With China retaliating to Trump’s already implemented tariffs, there is a genuine prospect of a trade war, although even here the report emphasises that the actual tariffs so far placed on foreign goods by the Trump administration are limited.
That’s not all. The report also emphasises that the rule of law in China is still not firmly established, and with the government involved in every aspect of daily life, there is the possibility that unseen structural problems in Chinese society will be the most likely creator of instability going forwards. The US and China could fall for the so-called Thucydides Trap, which states that a rising power will inevitably clash with the already dominant one. The report stressed that this clash isn’t imminent – even so, it stood out as the one to watch.
All in all, this is a weighty piece of work, and is plainly designed to calm clients and investors. Geopolitical tensions are there, yes, but there have been startling changes for the good in the last months (think Trump and Kim on Sentosa Island) and in any case, unpredictable world events shouldn’t deter investors from their long-term strategies. And while cryptocurrencies do seem to have huge volatlity, there is huge potential, the bank admits, for the underlying blockchain technology.
The main message then? Stay calm, stay invested, and don’t listen to the short-term noise.
Mert Acikgoz is a writer at Spear’s