The best place to put your money over the next one- and five-year periods is not in the US, according to the latest outlook from Goldman Sachs.
Instead, it’s in emerging market equities, the bank’s wealth management division said in a report earlier this month.
“Emerging market equities have the highest expected base case return, at 8%, to which we assign a 55% probability. We assign a 20% probability to EM returns exceeding our expectations and a 25% probability to a negative mid-teens return,” Sharmin Mossavar-Rahmani, the chief investment officer for Goldman Sachs Wealth Management, wrote in the report about their one-year forecast. “The volatility in our base case for emerging markets is the greatest among all the markets.”
Below is the chart showing Mossavar-Rahmani and her team’s outlook for the next 12 months and five years. The numbers on top of each bar represent rounded annualized return estimates (i.e. 6% annualized returns for emerging market equities over the next five years).
As for the group’s other stock forecasts, US stocks, represented by the S&P 500, rank second, with 7% growth in the next 12 months and an average return of 6% over the next half decade.
For the next five years, UK stocks and the MSCI All-Country World Index sit in the third and fourth position at 5% average returns.
Goldman considered earnings growth, dividend yields, and expected changes in valuations to come up with their forecasts.
While US valuations are historically high, the bank dispelled notions of a bubble, arguing that stock prices will remain elevated as the market continues to outperform.
“An important aspect of our assessment of US equities is the declining volatility of the US economy,” the bank said. “We believe this lower level of volatility implies a more reliable stream of corporate earnings, which, in turn, sustains a higher level of equity valuations.”
The report continued: “Valuation alone has limited bearing on the investment decision to stay invested or exit the market.”
Examples of funds that offer exposure to the bank’s expected top-performing trades include the iShares MSCI Emerging Markets ETF (EEM), the SPDR S&P 500 ETF Trust (SPY), the Franklin FTSE United Kingdom ETF (FLGB), and the iShares MSCI ACWI ETF (ACWI).
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