Goldman Sachs’ private banking arm has said it is focusing on seeking risk adjusted returns for its high net worth clients. In its market outlook briefing held this week, the bank presented its 12 – 18 month view, advising investors to overweight US equities and not be tempted by “cheap” Chinese equities.

“At the end of the day, our clients come to us having made their money so our first goal is to not lose them any money.  And the second goal is to try and grow it, at a reasonable rate of return. We think that US equities, US banks and European equities are a better risk adjusted return than Chinese equities are right now,” said Neeti Bhalla, head of tactical asset allocation, Investment Strategy Group at Goldman Sachs ;Private Wealth Management.

US equities

“The combination of easy monetary policy and attractive valuations means that the US equity market should return something like 4-6 per cent over the next few years. That is predicated on the view that…we don’t think that the cycle is about to peak and that a recession [in the US economy] is imminent,” said Bhalla.

She added that the US equity market is “much cheaper today, almost 10-20 per cent cheaper, than it was in October 2007 [when you hit the same S & P level]”.

US banks are a particular favourite of Goldman’s. According to Bhalla, these stocks are currently trading at about 1.1 times book value but should settle at around 1.4, suggesting “significant upside to US banks”.

“These are banks that have spent the last five years deleveraging extensively …and are now sitting on very clean balance sheets with a lot of excess liquidity. And they’re very highly leveraged to the recovery of the housing market,” she said, adding that Goldman also expects the dividend payout ratios of these stocks to increase, to the benefit of shareholders.

European Equities

Goldman has also been recommending clients to be overweight in the Euro Stoxx 50 –  the 50 largest mega-cap companies in Europe.

While some investors may question this advice in view of the European recession, Bhalla said:

“We’ve done research and found that there is no relationship between GDP growth and forward equity returns. So in fact you [investors] have been rewarded over time to buy low in weak growth equity markets because expectations have been so low and they’ve been reflected in cheap valuations…”

She added that while these are European names based in the region, more than 50 per cent of their sales come from the global economy – “so they’re really more global companies in their revenue mix”.

Though in order to maximise the “very attractive return profile” of the Euro Stoxx 50, one must hedge any Euro exposure. “We wouldn’t take that Euro risk,” said Bhalla.

China

Goldman is shying away from China until a number of much talked about reforms are in  play, said Jiming Ha, vice chairman and chief investment strategist, China, Investment Strategy Group.

Ha suggested reforms that involve the role of the government, the fiscal system and the financial sector in China.

“In other countries, the role of the government is to facilitate - on the regulatory side - economic growth, but in China many, particularly the local governments, are very hands –on in[achieving] economic growth. Most top level officials behave like they’re CEOs,” said Ha.

The Mainland’s leaders also need to make room for the private sector if they are to achieve efficiencies and economic growth.

“The private sector should not just invest in their own businesses, but also in the areas that are traditionally occupied by the state-owned enterprises should be open to the private sector, even infrastructure, for example,” he said.

And the tax system needs to become more progressive to stimulate domestic consumption and become less reliant on exports. Ha said: “In China, direct tax accounts for a small part of overall government spending, whereas indirect tax, such as VAT, counts for a very big part – this is suppressing consumption, it’s regressive.”

Meanwhile, Ha also expressed concerns about the transparency of GDP data released by China and also the financial sector, especially wealth management products and non-performing loans.

The bottom line is that currently Goldman wouldn’t recommend buying A-shares. “The performance outlook is range-bound, at best,” said Bhalla.

“The China market is down a year to date and the US market is up 10 per cent  - in fact if you look at it since 2009, Chinese equities have lagged,” she added.