Sharmin Mossavar-Rahmani, the chief investment officer for wealth management at Goldman Sachs, doesn’t buy into the growing consensus that U.S. investors should pull back on U.S. stocks in favor of adding emerging market and non-U.S. developed market shares. Nor is she concerned about rising inflation due to a growing budget deficit and overall debt burden.
In a recent webinar, Mossavar-Rahmani made the case for investors to overweight U.S. stocks, including large-caps, relative to market indexes and to emerging market and non-U.S. developed market stocks. “When we’re thinking about strategic asset allocations for clients, we want them to have more assets in the U.S. than market indexes would suggest.”
1. U.S. Preeminence
Supporting the overweight recommendation in U.S. equities is the theme of continuing “U.S. preeminence,” said Mossavar-Rahmani, disputing the idea China will lead the 21st century just as the U.S. led the 20th. “No one is even close to catching up” with the U.S., she said.
The US economy is the largest in the world, at $21 trillion, accounting for 25% of world gross domestic product (GDP), according to the 2021 outlook that Mossavar-Rahmani co-authored. It is 40% larger than China’s economy, the world’s second largest economy; 4.2 times as large as Japan’s, the third largest; and 64% larger than the economy of the eurozone.
The U.S. also tops other countries in GDP per capita and trend growth and in the quality of corporate management, human capital (specifically education) and the labor force, said Mossavar-Rahmani, adding that within corporate management, the quality is highest for U.S. multinationals.
She expects U.S. GDP this year will be around 6% if something close to President Joe Biden’s $1.9 trillion economic relief package passes Congress, which is very likely now that Democrats in the House and Senate have voted to move it along. (Goldman Sachs investment bank is forecasting 6.6% growth on the assumption that the Biden package passes).
Meanwhile, the MSCI Emerging Markets Index rose as much as 10% in January to a record high and may have hit a peak, according to Morgan Stanley.
2. Deficit Concerns Are Overblown
Biden’s almost $2 trillion economic support package will undoubtedly add to the U.S. budget deficit and increase the debt-to-GDP ratio. Goldman Sachs is projecting a 20% to 30% increase in the debt-to-GDP ratio from 2019 to the end of 2021, eventually reaching 120%-130% by 2030, but Mossavar-Rahmani is not too concerned about these numbers because interest rates remain low.
“Interest expense as a percent of GDP has been declining steadily and the number is projected to be around 1.3% and then down to 1.2% by 2023,” she said. “The numbers are very low … because interest rates are so low” and “the interest expense burden is similar to what it was in the 1960s.”
She also noted that there is evidence that Washington can deal with a growing debt trajectory before it reaches a tipping point, referencing the Budget Control Act of 2011, which raised the debt ceiling but cut spending, and the American Taxpayer Relief Act and Budget Control Act of 2012, which raised income taxes on individuals earning more than $400,000 (and couples above $450,000) but made permanent previous tax cuts for those earning less than those thresholds.
(The $1.5 trillion tax overhaul of 2017 undid the increase in the top marginal tax rate from 2012 and lowered other marginal tax rates but ended other deductions and exemptions and added to the deficit.)
3. Muted Inflation Outlook
Mossavar-Rahmani is not worried about rising inflation and not just because of the limited costs to service the U.S. debt. There are disinflationary impulses coming from China, “a major exporter of disinflation,” which is now joined by other Asian nations including Vietnam, Indonesia, Thailand and Cambodia, she said, adding that all put price pressures on U.S. companies.
Mossavar-Rahmani also doesn’t see where U.S. inflation will rise much from domestic sources — from labor (there are still millions unemployed because of the pandemic) or from excessive consumer demand chasing too few goods. The savings rate, which was high before the pandemic, has risen even higher — to 13.7% in December, according to the Federal Reserve Bank of St. Louis.
Mossavar-Rahmani says the core Consumer price Index (CPI) and core Personal Consumption Expenditures (PCE) — both exclude food and energy — could top 2.5% this spring because they will be compared to extremely depressed levels from last year, but that also isn’t much of a problem. “Fed Chairman Powell has already said it is transitory and they will look beyond that,” she says.
4. Low Interest Rates
The Fed has indicated it will likely keep the short-term federal funds rate in its current range between 0 and 0.25% for the next three years, which limits how high other rates can go, said Mossavar-Rahmani, explaining her outlook for interest rate constraint.
She expects the 10-year Treasury yield will range between 1% and 1.5% this year. The yield has been rising steadily since late January on expectations for stronger growth due to coronavirus vaccine distribution and for another large economic relief package. As of Friday’s close, the 10-year Treasury was yielding 1.16%, its highest yield since March 2020, just before the pandemic shut down the U.S. and global economy.
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