Head of company's asset management unit sees 15% spike over next year; QE3 coming?
The Standard & Poor's 500 Index may rise as much as 20 percent in 12 months and the dollar is poised to climb as U.S. economic growth tops investors' projections, Goldman Sachs Asset Management Chairman Jim O'Neill said.
The U.S. equity market will probably outperform the rest of the world and the dollar may strengthen 5 percent from current levels, O'Neill said in an interview in London today. The Federal Reserve will engage in another round of bond purchases, or “QE3,” if its current program fails to revive growth in the world's largest economy, O'Neill said.
The S&P 500 is little changed since Nov. 3, when the Fed said it would buy $600 billion of Treasuries, adding to an earlier $1.7 trillion asset-purchase program known as quantitative easing that's designed to cut unemployment and avert deflation. The Dollar Index, which tracks the U.S. currency against those of six trading partners, rose 3 percent during the period.
“If QE2 doesn't work, then we'll get QE3,” said O'Neill, who was named chairman of the money manager in September after working as the co-head of global economics research and chief currency economist at New York-based Goldman Sachs Group Inc. since 1995. There's a “good chance” the S&P 500 will rise 15 percent to 20 percent in the next 12 months, he said.
Goldman Sachs Asset Management oversaw about $820 billion as of Sept. 30.
China Slowdown
The S&P 500 has climbed 7.4 percent this year, following a 23 percent rally in 2009, as the U.S. economy rebounded from the worst global financial crisis since the Great Depression. A government report yesterday showed sales at U.S. retailers climbed in October by the most in seven months, brightening the outlook for holiday shopping even as unemployment holds near 10 percent.
“The U.S. economy is actually doing a bit better than people had thought so we might go through a phase here where people think the Fed might actually not have to deliver much of QE2,” he said. “If I'm right, the dollar will strengthen.”
China's government may target a slower annual economic growth rate of 7 percent in its next five-year plan, which might “shock” commodity markets, O'Neill said.
“Particularly in the commodity world, the whole game plan of the last decade” was based on rising demand from China, he said. “I think that game is in the process of changing.”
Today's tumble in Chinese stocks that sent the Shanghai Composite Index down 4 percent to a one-month low may still be a buying opportunity for long-term investors, he said.
‘Buying Opportunity'
“From a big-picture perspective it is a buying opportunity, but whether we saw the bottom this morning I don't know, because the Chinese need to make sure inflation doesn't pick up much,” O'Neill said.
Chinese Central Bank Governor Zhou Xiaochuan said today the country is under “pressure” from capital inflows and a state- run newspaper said price controls may be imposed to cool the fastest inflation in two years. Crude oil and copper futures sank more than 1 percent on concern Chinese demand will weaken.
O'Neill, 53, created the BRICs acronym in 2001 to describe the rising power of large emerging markets in Brazil, Russia, India and China.
The probability of a breakup of the euro is “no longer zero,” O'Neill said. Ireland is in talks with European and International Monetary Fund officials about a bailout that would shore up the state's finances as well as enable it to inject capital into the country's banks, said a European official with direct knowledge of the talks.
The Irish turmoil marks a new stage in a sovereign-debt crisis that was triggered by Greece and threatened to break the euro region apart in May. The euro has weakened 9 percent against the dollar during the past year.
