Graph of ownership breakdown of US equity markets from Goldman Sachs research note on October 15

Summary List Placement

Equity allocations have rebounded to their highest levels in two years at 47% of total financial assets, just below the tech bubble peak, which sat at 51%, said Goldman Sach’s equity analyst Arjun Menon in a recent client note.

Menon and his colleagues in the portfolio strategy research team released a new report exploring existing equity demand and forecasting supply and demand for equity in 2021. The team made five concrete predictions.

The outcome of the US elections is a prominent theme across the predictions with the potential of a so-called blue wave acting as a risk factor for some predictions.

“We expect overall equity allocation will climb in 2021,” Menon said. “The increase will likely be driven, in part, by a continued rotation away from cash. Although money market funds have experienced outflows during the past month, allocation to cash remains higher than its early 2020 levels and would have to decrease by another $3 trillion to reach its recent lows, all else equal.”

Prediction 1: Foreign investors will be the biggest buyers of US equities in 2021

Foreign investors have been the largest buyers of US stocks this year. This is a trend that Menon sees continuing into next year. 

“Foreign investors bought a total of $317 billion of US stocks in 1H, driven by investors in Europe, the Middle East, and Japan,” Menon said. “Following two consecutive years of selling, investors in China were also net buyers of US stocks in the first half of 2020 (+$29 billion).”

Foreign investors will purchase $350 billion of US equities in 2021 alongside a weakening US dollar, Menon said.

“A weaker-than-expected US dollar and reduced tensions with China could drive higher foreign investor demand for US equities than our baseline forecast,” Menon said.

However, under a “blue wave”, higher corporate tax rates in the US and increased regulatory uncertainty could create potential headwinds in investor demand, Menon said.

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On the other hand, US investors are expected to purchase $200 billion of foreign equities in 2021, Menon said. The annual average US investors spent on foreign equities was $120 billion over the last 10 years.

Prediction 2: US households will buy $100 billion of US stocks in 2021

US households are more than just retail investors; they include nonprofits, domestic hedge funds, private equity funds and personal trusts.

Goldman Sachs predicts that US households will buy $100 billion of US stocks in 2021. However, it also expects that the top 1% will continue to be the biggest driver of total demand.

“The top 1% has by far been the main source of equity demand from households during the past 30 years.”

The top 1% of the population have the majority of household equity ownership, owning $23 trillion — a near all-time high. For comparison, the bottom 90% own $5 trillion.

Although, a “blue wave” could be a risk to this prediction. If there was to be a Democratic sweep, the democrats are likely to increase the capital gains tax rate, which could push wealthy households to sell equities, Menon said. However, he also noted, in …read more

Source:: Business Insider


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