“Get Ready For The End Of Goldilocks” – SocGen’s 7 Key Calls For 2018

Wednesday, January 3, 2018
By Paul Martin

by Tyler Durden
Wed, 01/03/2018

In late November, when most banks were putting the finishing touches on the glowingly bullish year-end reports, the bulk of which see the S&P closing 2018 at 2,800 or above, French bank SocGen appeared to catch the bug from its famously dour strategist Albert Edwards and published what to date remains the most pessimistic forecast of what is now the current year. This is what SocGen said in late November:

We are less enthusiastic about equities heading into 2018 – We do not see much upside on our major equity targets for the next 12 months. We expect stretched valuations and rising bond yields to limit equity index performances in 2018 and the prospect of a US economic slowdown in 2020 to further cramp returns in 2019. We also raise some concerns about the quantity of shorts on volatility, which could potentially strongly deteriorate the risk reward profile of equity markets.

SocGen also noted that the S&P 500 has reached the bank’s target for the end of this cycle (2,500pts) and has since entering expensive territory (the S&P is now more than 200 points higher). Underscoring this point, SocGen said that on all the metrics, “US equities are trading at levels only seen during the late-90s bubble. Since Trump’s election, the US equity market has risen 24%, but only half of this came from earnings growth. The other half has been driven by P/E expansion.” Finally, SocGen said that according to its calculations, the US equity market has already fully pricing in tax reform, while the rise in bond yields and Fed repricing should be headwinds against further US equity rerating.”

In short: SocGen sees a world that is the diametric opposite of the low inflation, coordinated global growth “Goldilocks” scenario that serves as the basis of every single bullish forecast (all of which carry the disclaimer that should even a trace of inflation emerge, all bets are off).

Fast forward one and a half months later, with the S&P 200 points higher, when we get a chance to refresh if SocGen’s strategists have thrown in the towel on their bearish base case? The answer, as SocGen’s Alain Bokozba writes in a note issued this morning, is clearly no, and in fact Socgen remains defiant urging clients to “be ready for the end of Goldilocks.” Here’s why:

We began reducing our allocation risk profile in September and continue to do so. Asset valuations range from high to very high, but for emerging market (EM) assets, risk-taking and momentum-investment are at their peak. We think resynchronisation of global growth leaves the door open for a number of central banks to implement faster exit strategies than generally expected, especially the ECB and (later) the BoJ. The US economy is late cycle and impacted by perceived poor political leadership: we recommend sticking to a structurally bearish view on the still-expensive USD, which does not augur that badly for EM and commodities overall.

The Rest…HERE

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