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Goldman Sachs: Stay in Stock, No Bubble in Sight

By Michael Kling   |   Thursday, 16 Jan 2014 10:34 AM

Hold on to your stocks and don't be rattled by fear of bubbles, advise Goldman Sachs researchers.

"Our key takeaway is that both the odds and the penalty of being wrong when underweighting U.S. equities are very high," Goldman Sachs researchers emphasize in a recent report.

Although U.S. equities are expensive compared with their historical standards and other developed and emerging markets, high valuations are not a good reason to underweight stocks, state Goldman's Investment Strategy Group's Chief Investment Officer Sharmin Mossavar-Rahmani and Managing Director Brett Nelson.

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They cite four reasons why they see no bubble troubles in equities.

First, they note, "Credit growth, a key feature of financial asset bubbles, is not excessive." The latest year-over-year credit growth was 4.4 percent, well below the average of 7.3 percent since 1947 and near the lowest in more than 60 years.

Second, investor flows into U.S. equities, which turned positive in early 2013 after five years of outflows, have also been subdued.

Third, sentiment toward the United States still has more room to improve due to the nation's many strengths.

And finally, higher valuations do not foreshadow a market "implosion" or even negative returns. In fact, the Goldman team predicts earnings-per-share growth of about 6 percent for 2014.

High corporate margins are sustainable and macroeconomic factors point to a modest increase in global growth, they say. Plus, history shows that bull markets can continue for a long time when inflation is subdued and unemployment is high.

The researchers concede that "U.S. equities are quite expensive." However, they add, "While one’s initial reaction might be to underweight equities, further examination suggests that returns going forward are likely to be positive and higher than fixed-income or cash returns over the next five years."

"Stay fully invested. We don't have bubble troubles yet," said Mossavar-Rahmani at a press briefing, according to CNBC.

Goldman, according to CNBC, is recommending investors with moderate risk tolerance put 36.5 percent of their portfolio in stocks, 30 percent in investment-grade fixed-income investments and 14 percent in private equity and debt. The rest should be split between other fixed-income products, hedge funds and real estate.

Despite concerns of high valuations posted by some analysts, Goldman advises investing in high-tech stocks due to their strong free cash flows and good outlook for earnings growth.

They also like high-yield credit, pointing to low leverage and yields compared with investment-grade bonds.

"This is not a blind endorsement of buy and hold," Nelson said at the press brief, CNBC reported. "You need to consider a broader mosaic of factors to make an underweight decision and not simply rely on valuation as a stand-alone factor."

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Hold on to your stocks and don't be rattled by fear of bubbles, advise Goldman Sachs researchers.

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