The “risk” of higher prices has not been fully priced into equities markets, according to Goldman Sachs’ Chief Economist for Australia and New Zealand Andrew Boak.
Goldman Sachs earlier published its 2025 Outlook report in which it forecast the Reserve Bank of Australia (RBA) would start cutting official interest rates from the current 4.35% level in February 2025.
Delivering an online presentation of the report, Boak said he could not comment on the implications of the firm’s views for Australian equities specifically.
But the global base case was favourable for risk because, in the United States, growth was solid, inflation was falling, interest rate cuts were not-recessionary and regulatory policies under President-elect Donald Trump, including deregulation of some sectors, were friendly for earnings.
“Now the complicating issue is that the markets have already moved to price a lot of this in, and you've seen the dollar and yields move higher, but our view, again, at a higher level is that the good news is not yet fully priced,” Boak said.
“We still think that the risk is towards a stronger US dollar, the risk is skewed towards higher equity prices, and the risk is skewed toward further falls in bond yields in Europe and the UK.”
In its report Goldman Sachs lowered its 2025 gross domestic product (GDP) forecast for Australia by 20 basis points to 1.8% based on the assumption that under Trump the U.S. would increase tariffs on Chinese imports by 20 percentage points.
The firm expected annualised growth in underlying inflation in Australia to be within the RBA’s target band in the fourth quarter of 2024 and through 2025.
It said the continued easing in wage-sensitive inflationary pressure underscored the fact that Australia’s solid jobs growth was mostly driven by a positive labour supply shock that was not impeding disinflation across services.
Australia’s macroeconomic or financial conditions were not “that different” to its G10 peers (ex-Japan), which had started to normalise restrictive monetary policy settings.
“We expect the RBA to start lowering rates in February 2025, cutting at a quarterly pace to a terminal rate of 3.25%,” Goldman Sachs, noting that its forecast was more “dovish” than market pricing and consensus expectations.