Which Equity Markets Will Outperform?

This is the markets. I'm Chris Hussie and today is Wednesday, January 14th. And with me is Kunal Shah, Co-CEO, Goldman Sachs International. And he's coming to us live from the trading floor in London. Kunal, thanks so much for joining us. Of course, Chris, pleasure to be here. Okay, Kunal, let's start with the US because it did well, but it actually didn't outperform most of the countries in the world in 2025. Can the US outperform in '26? Is that valuation premium that's still there warranted? Look, a lot of enthusiasm for US assets you enter this year, that we ourselves came in constructive. If you look at a house research call for US GDP, quite significantly above consensus at 2.8%, but you can feel it in these first two weeks in markets. People are catching up to that enthusiasm. And I think there are quite a lot of tailwinds there at play. On one hand, you've just got easy financial conditions, you've got the Fed cuts that were delivered and just a knock on impact of that. You've got the AI story, a lot of credit creation in CapEx, which is just fueling that cycle in the US. This is also coming at a time when you're getting the tariff drag fading, fiscal impulses strong, and you're going to see that continue with tax refunds. Then there's deregulation, which we ourselves see in our own banking industry, but it just throws some fuel on that fire, which I think is what is bringing continued positivity when it comes to the US. Of course, you have to keep some measure here when you feel things are becoming, you know, well-digested and more consensual. If we look at our own prime data, look, you're starting to hit high levels of gross leverage, you know, five-year highs now with recent flows, you know, quite a lot of short vix positioning out there, risk appetite indicators that we track and are approaching, you know, highs for the year. So I think you do need to keep some degree of caution just given there's no longer, I'd say, as out of consensus views on the US. But structurally, when we look across the course of this year, we're still going to be trading from the alongside. I think it's also just backed up by technicals, just a sheer amount of liquidity and money supply growth in the US, which is outpacing even on the GDP. I think just means financial assets we think are just going to have some good tailwinds behind them. Of course, the flip side of those technicals on demand is supply, and there's been a lot of supply so far in credit markets, it has been what I just did. And more people will come also in the equity markets, particularly think later this year and the scope for some of these mega-cap IPOs. But, you know, I think those indigestion issues for later, I still think it's a steady current with a macro, and the technicals are going to be supportive. Now, on the point you make around the valuation premium for the US, okay? Look, I would say some of this acceptance is in the US. It's diminished. It's not finished. Okay, if you look at the equity market, multiples are higher than the rest of the world. We know some of that is down to the mix between tech and the sectors, right? But some are just, I think, very much merited on the basis US corporates continue to shine. They continue to outperform, and even last year's returns, whilst it was some multiple expanse in the US, a lot of it was just earnings growth. So, I think when it comes to companies in corporate America, it's warranted. And in effects, you know, within the dollar still overvalued, maybe around 15% when you look at our broad valuation models, but that's, you know, off quite a bit from the peaks of last year. So, you know, it is moderating in terms of that premium. Yeah, there's so much going out of the markets. Maybe one way to sort of put it is in the wake of the great financial crisis, the monitor would don't fight the Fed. Maybe in this post-pandemic act of boom, it's don't fight the fundamentals. We have so much fundamental tailwinds going on behind markets and on top of those technical fundamentals as well. It's a very good point you make, by the way, around, you know, the fundamentals are not fighting the Fed. I don't think the markets try to fight the Fed, of course, fears around central bank independence, and those that may be fighting the Fed are some of the risks to what I mentioned in terms of that US story. Yeah, no good point. Good point on the risks. All right, the flip side of this, of course, is what do you do with Asia and Europe, you know, 2025? Those, you know, a lot of those regions they outperformed, is that still the place to go? Do I want to buy Europe in Asia? And where do I want to be in the capital structure? So, look, as we said, strong momentum in the US, of course, the relative growth in Europe in Asia is important. I think it's important just to take stock of some of the structural factors at play, right? We have to remember that for years you had excess saffours in the other time zones, recycling and buying US assets, and some of those things have just structurally changed. There's, of course, an element there of the geopolitics, and that comes back from the legacy of sanctions and just concerns around exposure, or too much exposure to US assets. Some is also function of the focus on trade policy and reserve managers now being watched and just not as active buying US treasuries or US dollar in their reserve mix and portfolios. And I think another key element is just to shift from some of these countries in Europe and Asia having gone from being excess savers to now having loosened some of those fiscal constraints, particularly when you think about defense in having to own fund their own expansion, which just means the natural drift is going to be for more capital to be invested domestically and just less of that circulation going to the US. So that backdrop should help Europe in Asia. Now, of course, they have to deliver when it comes to growth and compete when it comes to those returns, but that's helpful. I'd say when I think about conversations we have with clients in Europe, there's a lot of pessimism. And there's a long list of reasons why people just think Europe still has structural issues. Equally for us, we would just say that means the bar for our performance is quite low. In under the hood, there are some areas where you are seeing some outperformance and some positivity. If you look at recent data, the German industrial orders showed that some of that defense spending is really starting to happen, and it's more domestically geared than some may have thought. And that is going to be positive when you think about some of those structural themes and no doubt German defense stocks are doing well so far this year. What do you think about the Euro currency? We think it can strengthen, but for us it's going to be in line with the shallow dollar depreciation that's our base case, which may mean let's say we get to 120. So that's going to help when it comes to returns, but it's not going to be said the primary driver of European assets. The threat for Europe, it comes from China. Post-3rd plenum, as we've seen, the doubling down on the export-driven growth in China as we've seen in the recent data is a competitive threat for Europe, but that too is going to help the continuation we think of the rally in Chinese assets. Now it has been sharp and fierce, and you've seen policy makers try and put the brakes on it in recent sessions like with some of these changes, the margin finance ratios, but the structural pinnings of it we think are strong. We expect there's going to be some more macro and fiscal easing in China. The AI theme is alive. Valuations are still structurally cheap when you compare to other markets, and it went from being uninvestable to being one where we really do see investors want to engage. I'd also say that the AI and tech theme is not just a China one, we're positive when it comes to markets like Korea, Taiwan. There will be gear to it, which builds on a broader emerging market equity thesis, which I know Stratford talked about, at a recent one of these, you know, in addition to domestic stories you have in Brazil, in India, in South Africa, which I think can help. Now whether this means European and Asian equities outperform the US, I think it's a hard one to judge. If I look at our own forecasts within a few percent, they're all in and around the same place. We are positive on all three regions, which I think helps at a time when, as I said, investors are looking to broaden and diversify. I think the game change will be if the FX market's really reawakened and you get broader divergence like we saw at some points last year. Right now, that isn't the base case for the framework. I think for that to kick in, it's either going to be more concerns around institutional quality in the US, or if you did see a sharper weakening of the labor market in the US, and the Fed could resume further cuts. That's when FX could kick in, and then maybe that's when the XUS equity markets really do materially outperform. All right, so it sounds like Kunal what you're saying is that we've got some bullish setups in the US, in Europe, in Asia, even in emerging markets. Everything is awesome. That is exactly the time I want to buy protection. So walk us through, because you've already mentioned a couple of the risks that are out there, the Fed, geopolitical, walk us through your favorite form of protection in an environment like this. Of course, you have to get cautious when you do see these consensual themes building. Look, again, typically also you're not meant to chase the first price action, you see out of the gates in a January. Right now, look, what I'd say in terms of places to look for protection, but we do think actually US rates now has a place as a portfolio diversifier. You have price to shallower easing cycle from here, just given some of the dynamics in terms of what's happening in the US. Right, if you look forward from here, the things that can really break this border narrative is if you do see the labour market weakness, all the US cycle slowed down despite the stimulus that's coming. And that's when I think given what's priced now in the front end of US rates, actually some US fixed income can help diversify some of the risk assets or equity loans that you have. It also means that the 60, 40 type dynamic may just help with the margins from here. I think the other places people are looking for hedges are the credit markets. Now we did have some of those canaries in the coal mines of credit issues late last year, but the markets came back close year with spreads really at tight percentiles. So it is tempting to look at credit shorts as the hedge. Right now, the number of incomes we have from non-credit specialists looking to short credit. Again, it's something that worries you about that being an effective hedge. At some point, spreads were widened. It's just hard to say that now the time is right and these are hard positions to carry until you start seeing defaults or something that really can make that kick in. And in the meantime, we've seen lots of issuance, but it's been well absorbed. So that's not one, you know, which we would veer to yet. I think the place to look though is in currency markets. Volatility in terms of what's being realised has subsided. What about gold? Traditionally, that's been a great place for protection. Now it seems like everybody's piling in. What's your view? Look, people are piling in. Now look, last year's returns were basically the best we'd seen in the last 40 years on the back of a couple of strong years. I think some of those reasons for gold out performance are in line with what I mentioned. Some of the structural forces at play. I do think that de-dollarisation theme was real and that's why we did see central bank participation. I do think the debasement theme is also there and it's lurking because of the monetary, the fiscal stimulus you're seeing and that's leading investors, not just central banks to buy. I don't know if fear is about de-lokalisation and this is down to geopolitics and that's why even retail are participating. So last year was not just about flows from central banks and it wasn't just coming from Asia. If you look at the ETF flows, they were growing and getting a large and significant in Europe, in US. So that's a steady investor undercurrent which we think is going to add to just people wanting to grow the allocations in gold. Now the sizes were large versus gold's own recent history but small versus the amount of liquidity in markets and the flows we're seeing in other places and if I look at our own franchise, not just from institutional investors but also when we think about our private wealth clients wanting to grow those allocations from low levels, I think that's going to help gold to perform. Now of course, as you get a broader range of investors involved and as you said, when everyone's buying, you have to be able to brace for drawdowns. We saw one of those in October. It was short lived, it got bought. I still think people will buy gold on dips, right? And there will be opportunities to reload over the course I'm sure of the next few weeks. Now what's going to change that for gold? Look, I think that's going to have to lead to scenarios where confidence comes back on fiat currencies or if you've got materially higher real rates in the US, which would make a flat and negative carry asset like this look tough, it's just hard to see how this scenario is kicking in the short term. Terrific. I mean, it's been a really busy two weeks already here in 2026. I'm looking forward to touching base with you later in the year to see how things are going. Canal, thanks so much for taking time with us. Absolutely. Thanks a lot Chris. That does it for this week's episode of the markets. I'm Chris Sussi. Thanks for listening. The opinions and views expressed herein are as of the date of publication, subject to change without notice and may not necessarily reflect the institutional views of Goldman Sachs or its affiliates. The material provided is intended for informational purposes only and does not constitute investment advice, a recommendation from any Goldman Sachs entity to take any particular action, or an offer or solicitation to purchase or sell any securities or financial products. This material may contain forward looking statements, past performance is not indicative of future results. Neither Goldman Sachs nor any of its affiliates make any representations or warranties, expressed or implied as to the accuracy or completeness of the statements or information contained herein and disclaim any liability whatsoever for reliance on such information for any purpose. Each name of a third party organization mentioned is the property of the company to which it relates, is used here strictly for informational and identification purposes only and does not use to imply any ownership or license rights between any such company and Goldman Sachs. A transcript is provided for convenience and may differ from the original video or audio content, Goldman Sachs is not responsible for any errors in the transcript. This material should not be copied, distributed, published or reproduced in whole or in part or disclosed by any recipient to any other person without the express written consent of Goldman Sachs. Copyright 2026, Goldman Sachs, all rights reserved.