GOLDMAN: Here Are The 10 Big Market Stories That Will Dominate 2015

At the beginning of the year, not many predicted the stock market would blast to new highs like they did. Almost no one predicted interest rates would stay this low. And few would have guessed oil prices would rally and crash the way they did.

Looking forward, the analysts at Goldman Sachs have been rolling out their 2015 forecasts through a series of notes. They have already offered their top eight trades for the year while forecasting that the S&P 500 would climb modestly to 2,100.

All of their forecasts fit in the context of their “Top Ten Market Themes For 2015.”

In a new 23-page report, analysts led by Dominic Wilson predict there will continue to be divergences in central bank policy as the Fed remains likely to raise rates next year while central banks in Japan and Europe loosen policy to stimulate their economies. Major asset classes will see low returns next year, and currency hedging will become an increasingly important component of investing.

We pulled some nuggets from Goldman’s report.

1. A broadening recovery

The US will lead the global economic recovery, while growth in developing markets will be boosted by low oil and commodity prices.

'We also have more confidence in our view that the US expansion has several years to run and in the resilience of the US economy to weak overseas demand,' the analysts wrote.

Source: Goldman Sachs

2. Developed market divergence lives on

The disparity between both growth and monetary policy around the developed world will continue into next year, with the Fed likely to begin raising rates while the European Central Bank and Bank of Japan keep easing.

The analysts wrote: 'This divergence has both an absolute and a relative dimension. In absolute terms, within DM economies, the continuation of softer growth and lower inflation in much of the non-US DM world will continue to keep the US yield structure lower than it would otherwise be. That force is likely to be less intense than it was in 2014, when Bund yields have helped to drag UST yields lower. But it is one reason to be confident that the rise in US yields will continue to be relatively moderate. On a relative basis, we think there is still scope for front-end rate differentials between the US and many others to widen further, which is a key driver of our view of a stronger USD.'

Source: Goldman Sachs

3. The new oil order

Lower oil prices (a 5% - 15% deflation) will linger and provide a boost for consumers' disposable income. But this may be a headwind for energy stocks, and commodities like copper and aluminium that use oil in their production.

'The disinflationary impulse from lower commodity prices sweeping across the world is likely to be manifested first in lower headline inflation rates,' the analysts explained. 'But, by boosting disposable income, there is also likely to be a positive impact on GDP growth in EM and DM oil importers that should become visible as the year progresses.'

Source: Goldman Sachs

5. The dollar bull market

The dollar will remain strong versus its G10 peers and most emerging markets, with EUR/$US at 1.15 and $US/JPY at 130 by the end of 2015.

'Within that view, continued declines in the EUR/$US rate are the single most important element, but we expect further meaningful weakness in the JPY as well,' the analysts wrote.

Source: Goldman Sachs

6. Fed: Later, steeper, further, calmer

The Fed's first rate hike will come in September 2015 and further increases will be faster than the market has priced in.

A gradual normalisation of policy rates in line with an improving economy may lead to bouts of volatility (as in 2004) and a flattening of the equity market uptrend,' the analysts wrote. 'But we doubt that it will prove disruptive for risk assets or the economy in a sustained way.'

Source: Goldman Sachs

7. China's bumpy downshift continues

The Shanghai-Hong Kong Connect scheme should attract investment into the A-share market (traded on China's exchange), possibly outperforming H-shares (traded on foreign exchanges), as China's economic growth continues to slide.

'While we still expect relatively solid GDP growth of between 6% and 7% over the next couple of years -- a sharper slowing would make the medium-term challenges that much more difficult to manage -- this does suggest that the upside in China-linked assets is somewhat capped in the coming year, and the best opportunities to express positive market views are likely to come when investors move towards extreme pessimism such as earlier this year or in the summer of 2013,' the analysts wrote.

Source: Goldman Sachs

9. The low-volatility world and its challenges

Volatility should be low across markets except rates, although low liquidity may bring some temporary spikes.

'The volatility of economic data has fallen to new lows (the 'Great Re-moderation'); unemployment continues to decline steadily; macroprudential measures are restraining leverage; the imbalances that end expansions are still some way off; and (US) recession risk looks low,' the analysts wrote.

Source: Goldman Sachs

10. Living in a low-return world

Major asset classes will offer low returns and FX will become more important.

'Comparing expected real returns from a range of core assets, the earnings yield on equities (and on a vol- adjusted basis, on parts of credit) still makes them more attractive than sovereign bonds on a relative basis. We also think we are in an environment where equity multiples are likely to stay above average and -- even in the US -- have the potential to move higher still.'

Source: Goldman Sachs

And here are the stocks that offer the most returns

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