Gs Macro Out Look 20171

MACRO RESEARCH | JANUARY 2017
GS MACRO OUTLOOK 2017

A selection of forecasts from our economists and strategists
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result, investors should be aware that the firm may have a conflict of interest that could affect the
objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision. For Reg AC certification and other important disclosures, see the Disclosure
Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not
registered/qualified as research analysts with FINRA in the U.S.
The Goldman Sachs Group, Inc.

Goldman Sachs GS MACRO OUTLOOK 2017
Table of Contents
The following are modified versions or excerpts of our 2017 Macro Outlook reports. All forecasts are as
of each reports original publication date unless otherwise noted. For the latest projections, please see
ERWIN on GS 360.
Global Outlooks
Global Economic Outlook: A Catalyst for Tighter Fed Policy..............................................................................7

November 16, 2016
Our 2017 GDP forecasts point to global growth at the top end of the 3%-3% average pace of the past five
years. Our baseline is for a moderate acceleration in the US and the more beaten-down parts of the emerging
world, coupled with broad stability in the Euro area, Japan, and China. We expect global growth to accelerate a
bit further in 2018 as EM growth continues to normalize and DM growth moves broadly sideways.
Global Markets Outlook: Top 10 Market Themes for 2017................................................................................13

November 17, 2016
We lay out the 10 market themes we expect to define the year ahead: (1) Expected returns: only slightly
higher; (2) US fiscal policy: a pro-growth agenda; (3) US trade policy concerns likely overdone; (4) EM risk:
Trump tantrum is temporary; (5) Trump and trade: hedge with RMB; (6) Monetary policy: focusing the toolkit
on credit creation; (7) Corporate revenue growth recession: signs of inflection; (8) Inflation: moving higher
across DMs; (9) The next credit cycle: kinder and gentler; (10) Yellen Call 2.0: now with contingent knock-
in.
Global Cross-Asset Outlook: Reflation Continuation, Risky Rotation...................................................................17

December 2, 2016
We are turning more pro-risk in our asset allocation, as we think the reflation trend will extend into 2017. We
remain Underweight bonds and are moving Overweight equities and commodities over both 3- and 12-month
horizons. We also move credit down to Neutral. We think reflation frustration or late-cycle concerns could drive
a risk-off episode and bonds might be less good hedges; we recommend increased cash allocations. Three
themes: (1) Reflation continuation, more repricing of reflation; (2) Resurgence of divergence between the US
and Europe and Japan; and (3) EM selectivity.
Global Credit Outlook: New Gear, Same Direction...................................................................................................19

November 28, 2016
We expect spreads will further compress driven by what we think will be a supportive macro environment and
gradual improvement in balance sheet fundamentals. We also expect defaults and downgrades will continue
to decline and move over the 2016 "commodity hump." US fiscal policy will likely be a source of upside risk to
growth, inflation, and rates while rising policy uncertainty will likely usher in more macro volatility. Our base
case is that spreads will digest higher rates as they did in previous hiking cycles. Our relative value views seek
to capture the following themes: (1) Finding the best tradeoff between carry and rates risk; (2) Positioning for
further compression across the quality spectrum; and (3) Minimizing exposure to sectors with secular
challenges.
January 2017 Page 2

Global FX Analyst 4Q2016: Dollar Reset.....................................................................................................................23

November 30, 2016
Our longstanding view has been that divergence in the activity and inflation outlook would drive rate
differentials in favor of the Dollar, and that the focus would shift away from ECB and BoJ easing to Fed
tightening. The US elections have finally moved the needle in this direction, representing a "reset" for the USD,
and the divergence theme is back in play. We expect the USD to continue to move higher over the next 12
months. In the G10 space, we also like Sterling, EUR and RMB downside positions.
Commodity Watch: Upgrading to Overweight Commodities in 2017....................................................................27

November 21, 2016
We believe the recent reacceleration in global PMIs suggests commodity markets are entering a cyclically
stronger environment. Supply restrictions from policy actions should benefit oil, coking coal, and nickel in the
near term while economic reductions should boost natural gas and zinc. Accordingly, we are upgrading our
GSCI returns forecast and recommend going long the enhanced GSCI commodity index and overweight
commodities.
Oil: Waiting for the Cuts.................................................................................................................................................29

December 16, 2016
The oil market has digested the OPEC and non-OPEC cut announcements and focus is shifting to the current
lackluster fundamentals. While Libya remains a wild card, we continue to believe that low-cost producers have
a strong economic incentive to cut production, and we expect relatively high compliance by participating
producers. These projected cuts and our strong demand growth forecast lead us to project a normalization in
inventories and backwardation across the forward curve by next summer.
Regional Summaries
US Economic Outlook: Under New Management....................................................................................................33

November 19, 2016
Given above-trend growth and the prospect of fiscal stimulus, we see the US economy moving into modest
disequilibrium over the next 1-2 years, with unemployment falling below its long-run sustainable rate and
inflation rising above the Feds target.
US Equity Outlook: Democracy in America and the Triumph of Hope Over Fear...............................................35
November 30, 2016
In 2017, we expect the stock market will be animated by competing views of whether economic policies and
actions of President Trump and a Republican Congress instill hope or fear. We expect "hope" will dominate
through 1Q 2017 as the S&P 500 climbs by 9% to 2400. "Fear" is likely to pervade during 2H, with the S&P
500 ending 2017 at 2300, roughly 5% above the current level. Top hope" investment recommendations: (1)
Cyclicals vs. Defensives; (2) Stocks with high US versus foreign sales exposure; and (3) High tax rate
companies. Top "fear" recommendations: (1) Low vs. high labor cost companies; and (2) Strong vs. weak
balance sheet stocks.
January 2017 Page 3

European Economic Outlook: A Fiscal Fillip Sustains the Modest Recovery.....................................................37

November 16, 2016
With the impulse from a depreciated currency and energy prices dissipating and little headroom for further
easing in credit conditions now that bank lending rates in the periphery have re-converged to core levels, the
broad-based support for Euro area growth is fading. Nevertheless, we expect the Euro area to keep on
growing at slightly below 1% between 2017 and 2020, underpinned by easier fiscal policy.
Europe Portfolio Strategy Outlook: Reflation Dislocations................................................................................39

November 28, 2016
We believe returns will be more positive in 2017, but without such dramatic sector dispersion as we saw in
2016. Stock dispersion should rise vs. sector dispersion, and themes should gain prominence.
EM Asia Economic Outlook: Global Reflation Meets Chinas Bumpy Deceleration........................................41

November 21, 2016
China and parts of Southeast Asia seem most likely to be negatively affected by the combination of higher
rates, a stronger dollar, and higher US trade barriers. For China in particular, the challenges of maintaining high
growth while attempting to fend off financial and other risks are likely to intensify in 2017 and will require
continued strong fiscal and credit supportwhich we believe authorities will provide.
Asia-Pacific Portfolio Strategy Outlook: A Reflationary Rose, With Thorns.......................................................43

December 1, 2016
Our investment ideas reflect our themes: (1) Reflation trades: infrastructure investment, GARP; (2) Thorn
trades: monetary policy winners/losers, CNY depreciation winners/losers; (3) Unique Asia trades: India
recovery basket, Asia domestic demand stocks.
Japan Economic Outlook: We Forecast Stable 1%+ GDP Growth in 2017..........................................................45

November 17, 2016
The Japanese economy has been seesawing for a couple of years, but we believe signs of a modest recovery
are beginning to emerge. We look for real GDP growth of +1.2% in 2017, with support from fiscal stimulus and
modest recoveries in consumer spending amid benign external demand environments.
Japan Strategy 2017: Reflation Rotation....................................................................................................................47

December 1, 2016
Despite a challenging 2016, Japan remains one of the best-performing developed markets since Abenomics
began in 2013, driven entirely by earnings rather than multiple expansion. For 2017, we believe the risk/reward
balance is favorable, and our new 12-month TOPIX target is 1660, or Nikkei 225: 21,000,* implying potential
upside of 7% (9% with dividends). Our outlook rests on four pillars: a favorable macro backdrop led by fiscal
stimulus, continued earnings growth, additional structural reforms, and a favorable flow of funds.
* TOPIX & Nikkei 225 targets are as of Dec. 21, 2016.
January 2017 Page 4

China Portfolio Strategy Outlook: Global Politics Reflate Old China....................................................................49

December 1, 2016
The incoming US government and the leadership transition in China will plot the macro story for Chinese
equities in 2017, potentially leading to reflation and higher rates globally, a strong commitment to uphold
growth in China, but more RMB weakness, in our view. We raise Energy and Staples to OW, and lower Tech to
MW to position for reflation cyclicality.
Latin America Economic Outlook: Time to Get Moving & Start Shaping the Future.........................................51
November 17, 2016
We expect aggregate regional growth to recover to 1.7% in 2017, driven chiefly by the end of the deep
recessions in Argentina and Brazil, and a very mild firming of growth in the small-open Andean economies.
Policy interest rates are expected to decline in most countries, given the expected moderation of the intense
inflationary pressures that swept the region in 2015-16. The forecasted improvement in economic performance
takes place off an admittedly undemanding comparative base and will likely fall short of the regions potential.
CEEMEA Economic Outlook: A Moderate Improvement in Growth, Weak Inflation, Dovish Policy..............53
November 18, 2016
We expect growth in CEEMEA to remain decent but unspectacular. There remains considerable support to
activity from the large easing in financial conditions that has taken place in the past 18 months. We also
expect the divergence between commodity-importing and commodity-exporting economies to diminish, as
the effects of past energy price declines fade. The outlook for monetary policy appears dovish across the
region, reflecting the weakness of inflation dynamics.
Australia Economic Outlook: Australias Role in a World of Reflation.................................................................55

November 21, 2016
As we look out to 2017 and beyond, we believe Australia has moved through an important transition point and
now faces the prospect of stronger and less volatile real economic growth. We have upgraded our economic
growth forecasts to average 2.8% in 2017 (+40ppt), 2.9% in 2018 (+10ppt), 3.0% in 2019 (+50ppt) and 3.3% in
2020.
New Zealand Economic Outlook: The Path to Higher Rates.................................................................................57

November 21, 2016
Our base case is that the current growth momentum is sustainable; our +3.7% GDP forecast for 2017 is
+70bp above consensus. Our optimism reflects a favourable mix of accommodative financial conditions, a
sizeable upgrade to the outlook for the construction cycle, ongoing tailwinds to consumer and tourism
spending, stronger election-year fiscal spending, a ~66% increase in dairy prices, and our forecast for global
industrial reflation.
Disclosure Appendix....................................................................................................................................................59
January 2017 Page 5

Page 6
FIRST PUBLISHED NOVEMBER 16, 2016
Global Economics Analyst Jan Hatzius

(212) 902-0394
A Catalyst for Tighter Fed Policy jan.hatzius@gs.com

Goldman, Sachs & Co.
n
Sven Jari Stehn
Although 2016 has been a disappointing year overall, global growth +44(20)7774-8061
is now accelerating to the top of the 3%-3% range that has jari.stehn@gs.com
Goldman Sachs International
prevailed throughout the past five years. The main reason is the
swing in the financial conditions impulse from sharply negative to Nicholas Fawcett
modestly positive, both in the US and in parts of the emerging +44(20)7051-8321
nicholas.fawcett@gs.com
world. Goldman Sachs International
n US President-elect Donald Trump and the Republican-led Congress
Karen Reichgott
are likely to pass a fiscal stimulus package, which could provide a (212) 855-6006
further temporary growth boost starting in mid-2017. However, karen.reichgott@gs.com
aggressive implementation of Trumps trade and immigration Goldman, Sachs & Co.
policies would likely weigh on growth.
n While Trumps proposed policies have ambiguous effects on
growth, they are likely to reinforce the gradual upward move in
inflation that is already underway, as output and employment are
now close to potential. Moreover, we remain skeptical that the
equilibrium interest rate has fallen as much as widely believed. We
therefore still expect the Federal Reserve to raise the funds rate
substantially more than implied by market pricing.
n Tighter Fed policy is likely to put further upward pressure on global
long-term rates. Faced with significant slack and low core inflation,
the ECB will try to insulate itself from the resulting tightening in
financial conditions with an extension of its asset purchase
program. The BoJ meanwhile will focus on the implementation of
its yield control policy. Greater interest rate divergence should put
continued upward pressure on the dollar.
n The risks to our baseline forecast are skewed to the downside.
First, much remains unclear about the economic policies of the
incoming Trump administration, and the positive initial market
reaction could reverse if the policy mix looks more unfavorable than
now widely assumed. Second, Europe could re-emerge as a source
of political risk, with the French election at the top of the list of
concerns. Third, a stronger dollar could lead to renewed pressure
on emerging markets, especially China.
Goldman Sachs Global Economics Analyst
Once again, global growth disappointed expectations in 2016. We currently estimate

that real GDP rose 3.0%, below the 3.5% we and the consensus predicted a year
ago and toward the bottom end of the 3% to 3% range seen over the past five
years. And the weakness was quite widespread. Among the major economies
shown in Exhibit 1, only Spain and China beat the consensus forecast. Meanwhile,
many of the biggest DM and EM economiesincluding the United States, Japan,
Italy, the United Kingdom, Italy, and Brazilfell significantly short.
Exhibit 1: Global Growth Disappointed Expectations in 2016...
Source: Consensus Economics, Goldman Sachs Global Investment Research
Acceleration Already in Train

But the disappointing numbers in Exhibit 1 are somewhat stale because the
weakness was due to statistical carryover from late 2015 and very slow growth early
in 2016. By contrast, the more recent sequential global growth paceas measured
either by global real GDP or our top-down current activity indicatoris already
notably better, as shown in Exhibit 2.
Why the improvement? In our view, the main reason for the acceleration lies in
financial conditions. Since the spring, we have argued that US growth would soon
pick up because the financial conditions impulsethe impact of lagged changes in
financial conditions on growthwould soon go from sharply negative in 2015 and
early 2016 to mildly positive in late 2016 and 2017.1
1
See, for example, Jan Hatzius and Chris Mischaikow, Upside Risks from Financial Conditions, US
Daily, April 19, 2016.
16 November 2016 Page 8

Exhibit 2: ... But Has Started to Accelerate
Source: Goldman Sachs Global Investment Research
We have now broadened this analysis to the global level, and the same basic logic
applies. In the advanced economies, Exhibit 3 shows that financial conditions were
a clear positive for growth in 2013, largely because of easier monetary policy. The
impulse turned sharply negative in 2015 and early 2016, to the tune of about -1
percentage point (pp). The reasons were a steep trade-weighted appreciation of the
US dollar and several episodes of weakening risk markets. With currencies and risk
markets more stable now, the comparisons have improved markedly and this drag
has turned into a boost. If financial conditions remain around current levels, this
positive impulse should persist for most of 2017.
In the emerging world, the FCI impulse was almost continuously negative in 2014-
2015, but started to turn more positive in early 2016, just as the concern about an
emerging market crisis reached its crescendo. At this point, we estimate that past
changes in financial conditions are contributing about +1pp to EM growth, up from
around -1pp in 2014-2015. And if conditions stay near current levels, we project a
continued boost through 2017.

Exhibit 3: Positive Impulse from Financial Conditions in 2017
The FCI impulse analysis suggests that the recent improvement in global growth
momentum will persist. Thus, our 2017 GDP forecasts in Exhibit 4 point to global
growth at the top end of the 3%-3% average pace of the past five years. Our
baseline is for a moderate acceleration in the United States and the more beaten-
down parts of the emerging world, coupled with broad stability in the Euro area,
Japan, and China. We expect global growth to accelerate a bit further in 2018 as EM
growth continues to normalize and DM growth moves broadly sideways.

Exhibit 4: The GS Global Growth Outlook
Source: Bloomberg, Goldman Sachs Global Investment Research

Page 12
Global Markets Analyst Charles P. Himmelberg

(917) 343-3218
charles.himmelberg@gs.com
Top Ten Market Themes For 2017: Goldman, Sachs & Co.
Higher Growth, Higher Risk, Slightly Francesco Garzarelli

+44(20)7774-5078
francesco.garzarelli@gs.com
Higher Returns Goldman Sachs International
Robin Brooks
Our Top Ten themes are: (212) 902-8763
robin.brooks@gs.com
1 Expected returns: Only slightly higher
Silvia Ardagna
2 US fiscal policy: A pro-growth agenda +44(20)7051-0584
silvia.ardagna@gs.com
3 US trade policy: Concerns are likely Goldman Sachs International
overdone
Kamakshya Trivedi
+44(20)7051-4005
4 EM risk: 'Trump tantrum' is temporary kamakshya.trivedi@gs.com
5 Trump and trade: Hedge with RMB
Lotfi Karoui
6 Monetary policy: Focusing the toolkit on (917) 343-1548
lotfi.karoui@gs.com
credit creation
7 Corporate revenue growth recession: Kenneth Ho
Signs of inflection +852-2978-7468
kenneth.ho@gs.com
8 Inflation: Moving higher across DM Goldman Sachs (Asia) L.L.C.
9 The next credit cycle: Kinder and gentler
10 The 'Yellen Call' 2.0: Now with 'contingent

knock-in'
Goldman Sachs Global Markets Analyst
Higher growth, higher risk, slightly higher returns

We expect a lack of investment opportunities to remain an enduring challenge for
investors in 2017. We think this despite the fact that economic growth will likely pick
up in 2017 vs the somewhat disappointing performance in 2016. Indeed, over the
past several months, the growth rate of global GDP already appears to be realizing at
the top of the 3%-3% range that has prevailed throughout the past five years. The
main reason is the swing in the financial conditions impulse from sharply negative to
modestly positive, both in the US and in parts of the emerging world. And the fiscal
stimulus that will likely be enacted by the new Trump administration, and in other
advanced economies, will only reinforce the inflation pressures already in place. With
output and employment already close to potential, the rising inflation pressure
strengthens our conviction that the Federal Reserve will likely raise the funds rate in
December and again three more times during 2017 (A catalyst for tighter Fed
policy, Global Economics Analyst, 16 Nov 2016).
Stronger cyclical growth in the US will probably not do much for asset markets
except help shift the narrative from low-flation and monetary accommodation to
reflation and rising rates. But this will not change the fact that the trend growth rate
of GDP appears to have fallen for both advanced and emerging economies during
the post-crisis period. Meanwhile, valuation levels for equities and especially bonds
remain highly elevated by historical standards, so expected returns appear to be low
across most asset classes. In fixed income, yield is scarce, and in equities, growth is
scarce. So investors have been pushed into less familiar strategies, such as equity
investors reaching for yield in high-dividend, low-vol stocks, or bond investors lining
up to own the growth risk inherent in the long-duration bonds of tech companies.
In our view, expected market returns are likely to remain low as long as investors
remain convinced that the growth outlook is anaemic. But many of the fundamental
drivers behind the declining trends in DM GDP growth are likely to stay weak for the
foreseeable future. One of the sustained headwinds for GDP growth in recent years
has been the declining growth rate of the working-age population (age 16-64). In the
US, for example, this fell sharply from 1.52% in 1998 to just 0.32% in 2016, while in
Europe it fell to a negative rate of -0.53% (from +0.24% in 1998). Productivity
growth is low, too, so there has been little to offset the demographic drag on
growth. The 5-year annualized growth rate of labor productivity in the OECD, for
example, has fallen to 0.49% from 1.67% in 1998.
There are reasons to think the longer-term outlook could brighten next year this is
part of the higher volatility (to the upside) featured in our Outlook title. For one, in
most countries, the falling growth rate of the working age population is forecast to
decelerate over the next several years. Second, research by our economics team
suggests that the pace of scientific discovery and technological change has not
slowed nearly as much as measured productivity indices would suggest (Doing the
Sums on Productivity Paradox v2.0, US Economics Analyst, 24 July 2015). Finally,

Goldman Sachs Global Markets Analyst
there is the theoretical, but untested, possibility that untapped productivity growth
lies hidden in the economy, and that all that is required is to let it run hot for a
while; perhaps the mix of Chair Yellens Fed and President-elect Trumps spending
will help growth surprise further to the upside than most assume possible. But we
are skeptical. Until more clear evidence accumulates showing that the outlook for
productivity and trend growth has improved, the opportunity set for investors is likely
to remain low.
Exhibit 1: Our global market forecasts for 2017

Page 16
Christian Mueller-Glissmann, CFA
FIRST PUBLISHED DECEMBER 2, 2016 +44(20)7774-1714
christian.mueller-glissmann@gs.com
Ian Wright
GOAL: Global Opportunity Asset Locator +44(20)7774-2600
ian.wright@gs.com
Outlook for 2017: Reflation Peter Oppenheimer
+44(20)7552-5782
Continuation, Risky Rotation peter.oppenheimer@gs.com
Jeffrey Currie
n We are turning more pro-risk in our asset allocation, as we (212) 357-6801
jeffrey.currie@gs.com
think the reflation trend will extend into 2017. We expect global Goldman, Sachs & Co.
growth to pick up to 3.5% in 2017 vs. 3.1% in 2016, with macro Charles P. Himmelberg
data for the past several months indicating that growth has picked (917) 343-3218
charles.himmelberg@gs.com
up already. We are moving to Overweight Equities and Goldman, Sachs & Co.
Commodities and move Credit down to Neutral. We remain
Francesco Garzarelli
Underweight Bonds. Commodity returns are boosted by the +44(20)7774-5078
OPEC cut, a stronger cyclical backdrop and more positive roll francesco.garzarelli@gs.com
yields. Equities can do well in bond bear markets and equity/bond
Kathy Matsui
return correlations have been negative since the late 90s. Our +81 (3) 6437-9950
equity strategists forecast better, albeit moderate, returns in 2017. kathy.matsui@gs.com
Goldman Sachs Japan Co., Ltd.
Credit was our preferred asset class in 2016 and we have been
reluctant to rotate to equities, but, with the large and more credible Timothy Moe, CFA
+852-2978-1328
drag on credit return from higher yields and less valuation buffer timothy.moe@gs.com
from spreads, we lower credit. Goldman Sachs (Asia) L.L.C.
n It is a risky rotation. The Sharpe ratio for a 60/40 portfolio in the David J. Kostin
(212) 902-6781
last five years has been close to the highest levels of the last 200 david.kostin@gs.com
years. Bonds have been a key contributor to returns and
diversification in multi-asset portfolios. Now, after 35 years of Robin Brooks
(212) 902-8763
strong risk-adjusted real returns, we believe the end of one of the robin.brooks@gs.com
longest bond bull markets since 1800 is looming as reflation Goldman, Sachs & Co.
momentum has picked up - investors are being forced to rotate out Kamakshya Trivedi
+44(20)7051-4005
of bonds and buffer bond losses. But the opportunity set in risky kamakshya.trivedi@gs.com
assets is quite limited as we are more late cycle, in our view, with Goldman Sachs International
valuations across asset classes mostly above average. Elevated Silvia Ardagna
valuations could provide a speed limit for returns if the pick-up in +44(20)7051-0584
silvia.ardagna@gs.com
(and optimism on) growth is not strong enough. The mix of growth Goldman Sachs International
(or optimism) and rates will be key for risky assets to digest higher
Damien Courvalin
rates from here. Reflation frustration or late-cycle concerns (212) 902-3307
damien.courvalin@gs.com
could drive a 'risk-off' episode and bonds might be less good Goldman, Sachs & Co.
hedges; we recommend increased cash allocations.
Lotfi Karoui
n Three themes: (1) reflation continuation - more repricing of (917) 343-1548
lotfi.karoui@gs.com
inflation; (2) resurgence of divergence - Japan another US reflation Goldman, Sachs & Co.
winner; and (3) EM - from valuation asymmetry (hope) to the cycle
(growth). Three risks: (1) Too fast, too furious - rate shock risk and
diversification desperation; (2) reflation frustration and late-cycle
realisation; and (3) politics and policy uncertainty continuing in 2017.
Disclosure - This report is intended for distribution to GS institutional clients only.
Goldman Sachs GOAL: Global Opportunity Asset Locator
Key views across asset classes

Forecasts and views on specific asset classes are attributed as follows: Equities:
Peter Oppenheimer, David Kostin, Kathy Matsui, Tim Moe; Credit: Charlie
Himmelberg, Lotfi Karoui; Bonds: Francesco Garzarelli; FX: Robin Brooks, Silvia
Ardagna, Kamakshya Trivedi; Commodities: Jeff Currie, Damien Courvalin.
Equities: We expect front-loaded returns in the US and are OW Japan and the US
over 3m, while we are UW Asia ex Japan and UW Europe. Over 12m, we are OW
Japan and Europe, Neutral Asia ex Japan and UW the US. We have a cyclical tilt in
the sector portfolio and like US exposure across non-US DM equity markets. We like
infrastructure and energy exposure.
Government Bonds: We expect G4 10-year yields to rise over 2017, with USTs going
to 2.75%, Bunds to 0.80%, JGBs to 0.15% and Gilts to 1.65%. Over 3m we are OW
JGBs, Neutral Treasuries and UW Bunds. Over 12m we are Neutral across regions.
We like being long breakeven inflation in both Europe and the US.
Credit: We expect further compression in US and EUR IG and HY cash credit

spreads in 2017. We are OW EUR and US HY, Neutral US IG and UW EUR IG and
expect more compression in the quality spectrum.
Commodities: We forecast WTI oil at $55/bbl in 1H2017 and $50/bbl in 2H2017, with
backwardation contributing to positive roll returns. We forecast supply divergence in
industrial metals (zinc/nickel v. copper), and see potential risks to the downside for
gold from our 1200/1200/1250 $/toz 3/6/12m targets.
FX: In G10 FX, we forecast dollar strength, with EUR/USD moving to 1.00, USD/JPY
to 115 and GBP/USD to 1.14 by 2017YE; we are also long USD/CNY, forecasting the
cross at 7.30 by 2017YE. In EM FX, we think the carry case in strong fundamental
EMs is still good, although harder relative to 2016; we are long BRL, RUB, INR, and
ZAR against KRW and SGD.
Exhibit 1: More reflation in our asset allocation
2 December 2016 Page 18

Lotfi Karoui
Global Credit Outlook 2017: (917) 343-1548
lotfi.karoui@gs.com
New Gear; Same Direction Goldman, Sachs & Co.
Charles P. Himmelberg
(917) 343-3218
Tighter spreads in a higher vol regime charles.himmelberg@gs.com
We expect spreads will further compress in 2017 driven by what
we think will be a supportive macro environment coupled with a Bridget Bartlett
gradual improvement in balance sheet fundamentals. We also (212) 357-5522
bridget.bartlett@gs.com
expect defaults and downgrades will continue to decline and move Goldman, Sachs & Co.
over the 2016 "commodity hump." US fiscal policy will likely be a
source of upside risk to growth, inflation and rates while rising Chris Henson
(801) 741-5755
policy uncertainty will likely usher in more macro volatility. Our chris.henson@gs.com
base case is that spreads will digest higher rates as they did in Goldman, Sachs & Co.
previous hiking cycles. That said, with output and employment
Spencer Rogers, CFA
almost at full capacity, the risk of an inflationary shock and thus a (801) 884-1104
risk-off rates selloff is not negligible, at least by post-crisis spencer.rogers@gs.com
standards.
Our key relative value themes

Our relative value views seek to capture the following themes: (1)
finding the best tradeoff between carry and rates risk; (2)
positioning for further compression across the quality spectrum;
and (3) minimizing exposure to sectors with secular challenges.
More specifically: (1) we prefer leveraged loans over HY bonds, and
AAA CLO tranches over plain vanilla high quality IG bonds; (2) in HY,
we recommend being overweight B, neutral on CCC and
underweight BB-rated bonds; (3) in IG, we recommend being
overweight BBB-rated bonds vs. their AA and A-rated counterparts;
(4) across IG spread curves, we prefer 7/10-year vs. 30-year
maturities; (5) across IG sectors, we are constructive on Banks and
Energy, and negative on Technology and Retail; (6) across HY
sectors, we are constructive on Building Products and negative on
Technology, Media, Metals and Mining, and Retail.
New risks but no cycle turnaround

In addition to a less friendly mix of growth and inflation, we will be
watching three other sources of risk on the macro front. First, US
policy uncertainty could weigh on sentiment and cause spreads to
widen. Second, political uncertainty in Europe could weigh on
sentiment in the EUR market. But we would view any large selloff
as an opportunity to add risk given our expectation of further
easing from the ECB. Third, concerns over the growth outlook in
China and the broader EM complex could resurface. These risks
notwithstanding, we do not expect a turnaround in the credit cycle.
Goldman Sachs
New gear; same direction
Tighter spreads in a higher vol regime. We expect spreads will moderately

compress in 2017, both in the USD and EUR markets (Exhibit 1). In the US, we
forecast IG and HY cash spreads will tighten by year end 2017 to 111 and 430bp,
respectively. When benchmarked to the history of the past three decades, these
forecasts imply that USD IG and HY spreads will finish 2017 in the 51st and 33rd
percentiles, respectively vs. the 60th and 40th percentiles currently (see Exhibit 2).
Key to this view is our expectation that the top-down drivers of credit risk appetite
will remain fairly supportive while bottom-up balance sheet fundamentals will
continue to gradually improve. The US fiscal agenda will likely be a source of upside
risk to growth, inflation and rates while rising policy uncertainty will likely usher in
more macro volatility. But we think overall, the macro environment will remain
supportive to the asset class.
Exhibit 1: We expect spreads will further tighten in 2017, both in the USD and EUR markets
We use the OAS on the Yield Book Citi IG and the BAML High Yield Master II indices for the USD market and
the spread to benchmark on the iBoxx EUR IG and HY indices for the EUR market.
Source: BAML, Haver Analytics, iBoxx, The Yield Book Citi Index, Goldman Sachs Global Investment Research
The appetite for credit risk will remain firm. We expect the following drivers will
remain powerful sources of demand for USD credit in 2017. First, the appetite from
foreign investors for USD spread products will likely remain firm as the carry
differential between USD fixed income markets and the rest of the G10 complex
further grows. Second, higher volatility notwithstanding, we think credit valuation
remains competitive from an asset allocation standpoint. While most US asset
classes are trading at rich levels relative to historical norms, corporate credit spreads
appear to be the least stretched, supportive to demand prospects from asset
allocators. Finally, coupon and principal payments in 2017 appear to be well-matched
against potential new issue volumes, with the supply/demand balance more
favorable on the margin for the US HY market vs. IG. Over the course of 2017, we

Goldman Sachs
anticipate $207 billion of coupon and principal payments will be re-invested in the US
HY market. Comparatively, in IG, we would expect $900 billion of coupon and
(mostly) principal payments.
Exhibit 2: When benchmarked to the history of the past three decades, our forecasts imply that USD IG and HY spreads will finish 2017 in
the 51st and 33rd percentiles, respectively vs. the 60th and 40th percentiles today
Source: BAML, Haver Analytics, The Yield Book Citi Index, Goldman Sachs Global Investment Research
Higher rates: So far, so good but the mix of growth and inflation will be the key
ingredient. Expansionary US fiscal policy will likely further boost the ongoing
inflation pressures and thus prompt the Fed to tighten monetary policy. Our US
economists expect the Fed will raise the funds rate in December and again three
more times during 2017. Such an outcome will likely push US long-dated rates higher
from current levels and thus turn the focus among credit investors to the risk from
rising rates. So far, both IG and HY spreads have shrugged off the move higher in
rates, suggesting credit markets remain comfortable that the forward joint trajectory
of growth and inflation will remain friendly (see Exhibit 3). Our baseline view is that
spreads will likely resist higher rates as they did in previous hiking cycles. But
relative to the past few years, we acknowledge a greater risk that higher inflation
dominates the growth impulse from easier fiscal policy. With output and
employment almost at full capacity, the risk of an inflationary shock and thus a risk-
off rates selloff is clearly not negligible, at least by post-crisis standards.
Three key macro risks on the horizon. In addition to a less friendly mix of growth
and inflation, we will be watching three other sources of risk on the macro front in
what we think will otherwise be a higher volatility environment relative to 2016.
First, US policy uncertainty could weigh on sentiment and cause spreads to widen.
In particular, any aggressive implementation of Trumps trade and immigration
policies would be negative for growth and thus reverse the markets positive post-

Goldman Sachs
election reaction. Second, the election cycle in Europe could inject a meaningful
dose of political uncertainty. The surprise outcome of the US election could further
boost anti-establishment movements in the Euro area, where voters in the
Netherlands, France, Germany and Italy will head to the polls over the upcoming
months. Finally, we think concerns over the growth outlook in China and the broader
EM complex could resurface as additional dollar strengthening leads to renewed
pressure on emerging markets, especially China.
Exhibit 3: Spreads will likely continue to digest higher rates but Exhibit 4: Tentative signs of improvement in ROA
the mix of growth and inflation will be the key ingredient Seasonally-adjusted EBITDA to toal assets ratios for the median US IG
12-month rolling beta of monthly changes in IG and HY spreads to and HY non-financial corporations, ex-Energy and Metals and Mining.
monthly changes in the 10-year Treasury yield. These beta estimates
can be thought of as the response of IG and HY spreads to a 1% move in
the 10-year Treasury yield.
Source: BAML, Haver Analytics, Goldman Sachs Global Investment Research Source: Compustat, Goldman Sachs Global Investment Research

The Global FX Analyst Robin Brooks

(212) 902-8763
Fourth Quarter 2016: Dollar Reset robin.brooks@gs.com

Kamakshya Trivedi
+44(20)7051-4005
G10 FX Outlook: Dollar Reset kamakshya.trivedi@gs.com
Our longstanding view has been that divergence in the activity and Goldman Sachs International
inflation outlook would drive rate differentials in favor of the Dollar, and
Silvia Ardagna
that the focus would shift away from ECB and BoJ easing to Fed +44(20)7051-0584
tightening. The US Presidential elections have finally moved the needle silvia.ardagna@gs.com
in this direction, representing a "reset" for the USD, and the divergence Goldman Sachs International
theme is back in play. US front-end interest rates have moved up, but Michael Cahill
the market in our view is still catching up to the changed landscape (212) 902-9964
and is pricing too little tightening through end-2019, which points to michael.e.cahill@gs.com
further upside for the Dollar. We expect the USD to continue to move
higher and we forecast the TWI USD to appreciate about 7% versus Mark Ozerov
+44(20)7774-1137
G10 currencies over the next 12 months.
mark.ozerov@gs.com
Sterling, EUR and RMB downside are also positions we like
In addition to USD strength, we also like some other idiosyncratic Ian Tomb
themes in G10 space. Sterling downside has fallen out of favor, but we +44(20)7552-2901
ian.tomb@gs.com
think Sterling remains one of the most actionable themes. In mid- Goldman Sachs International
November, we went short Sterling and the Euro against the Dollar as
Olivia Kim
one of our Top Trade recommendations for 2017. We also went short
+44(20)7552-0450
the RMB as one of our Top Trades. While this is partly a Dollar play, olivia.kim@gs.com
there is asymmetry from the fact that a rising $/CNY fix could cause Goldman Sachs International
capital outflows to pick up, even before taking into account potential
trade frictions.
EM FX Outlook: A bumpier path, but the case for good carry in EM is

still good
The case to earn good carry in EMs with strong fundamentals is still
good, in our view. The real carry in the asset class has been rebuilt,
there are clear improvements in EM macro fundamentals and
valuations are supportive, especially following the recent sharp sell-off.
These are important and positive differences in comparison to the
'taper tantrum' episode of 2013, and they should support EM FX
through a harder climb in 2017, against a challenging backdrop of rising
core rates and the prospect of trade protectionism in DM. Our Top
Trade recommendation in EM FX, which reflects these themes, is long
an equally-weighted basket of BRL, RUB, INR and ZAR versus short an
equally-weighted basket of KRW and SGD.
Goldman Sachs The Global FX Analyst
Exchange Rate Forecasts
Euro Crosses
Source: Goldman Sachs, Goldman Sachs Global Investment Research

Goldman Sachs The Global FX Analyst
Dollar Crosses
Source: Goldman Sachs, Goldman Sachs Global Investment Research
The authors would like to thank Lorenzo Incoronato for his contribution. Lorenzo is
an intern with the Global Markets Team.

Page 26
Jeffrey Currie
FIRST PUBLISHED NOVEMBER 21, 2016 (212) 357-6801
jeffrey.currie@gs.com
Damien Courvalin
Commodity Watch (212) 902-3307
Why High Commodity Prices Can Be Goldman, Sachs & Co.

Michael Hinds
Good for the World: Upgrading to (212) 357-7528

michael.hinds@gs.com
Overweight Commodities in 2017 Max Layton

+44(20)7774-1105
max.layton@gs.com
Recommending overweight commodities and long enhanced GSCI. Goldman Sachs International
Historically, when the US and Chinese output gap closes and inflation Christian Lelong
begins to rise, this has been a buy signal for commodities. We believe the (212) 934-0799
christian.lelong@gs.com
recent reacceleration in global PMIs suggests commodity markets are Goldman, Sachs & Co.
entering a cyclically stronger environment. Supply restrictions from policy
Abhisek Banerjee
actions should benefit oil, coking coal and nickel in the near term while +44(20)7774-8190
economic reductions should boost natural gas and zinc. Accordingly, we abhisek.banerjee@gs.com
are upgrading our GSCI returns forecast to +9.0% /+11.0%/+6.0% on a 3,
6 and 12 month basis from -2.0%/+1.7%/+8.3%. Hui Shan
(212) 902-4447
hui.shan@gs.com
The increased likelihood of an OPEC cut motivates our near-term Goldman, Sachs & Co.
forecast upgrade. Stronger than expected demand growth and lower
Yubin Fu
production from high-cost countries increase our confidence that the +44(20)7552-9350
global oil market will shift into deficit by 2H17 even with OPEC production yubin.fu@gs.com
above current levels. Thus, there is now a stronger incentive for OPEC
producers to halt inventory growth in 1H17 and normalize the current high Amber Cai
+852-2978-6602
level of inventories with a short-duration production cut. We think a cut amber.cai@gs.com
should generate backwardation helping OPEC grow market share by Goldman Sachs (Asia) L.L.C.
sidelining higher-cost producers and reduce oil price volatility Chris Mischaikow
increasing the valuation of their debt and equity. (212) 902-3053
chris.mischaikow@gs.com
Higher commodity prices likely to improve financial conditions.
Commodity prices are correlated with the accumulation and de- Mikhail Sprogis
+44(20)7774-2535
accumulation of EM excess savings. Unlike in the 1970s, more mikhail.sprogis@gs.com
sophisticated financial markets in the 2000s were able to transform the Goldman Sachs International
excess savings into greater global liquidity that increased asset values, Huan Wei
(212) 357-2353
lowered interest rates and improved credit conditions that spanned the huan.wei@gs.com
globe. Weak commodity prices in 2015 and 2016 acted as a drag on Goldman, Sachs & Co.
financial conditions. Callum Bruce
+44(20)7774-6112
A bullish dollar view is not incompatible with a bullish commodity callum.bruce@gs.com
view. We expect that the positive roll return from backwardation in
commodities will offset the downward pressure from a strengthening
dollar, as has historically been the case.
We upgrade our 3/6/12-month iron ore price forecasts to $65/63/55

per tonne. Steel consumption is more resilient than expected and
demand for iron ore is likely to be supported further by incremental
restocking across the steel supply chain. Further, the pace of supply
growth has slowed as a result of delayed capital expenditure and
operational challenges.
Goldman Sachs Commodity Watch
We downgrade our 3/6-month gold price forecast to $1200/toz on stronger

cyclical outlook. Downside risks remain from potential physical ETF liquidation.
However, our 12-month outlook is unchanged at $1250/toz as it depends on how the
Fed responds to potential US stimulus and inflation as the economy reaches full
employment.
Cyclically driven commodity reflation. We recommend going long the enhanced

GSCI commodity index (number 139) indexed to 100 with a target of 112 and a stop
of 94. We prefer the enhanced structure to reduce the current negative carry on oil.
Price action, volatility and GS forecasts

FIRST PUBLISHED DECEMBER 16, 2016
Damien Courvalin
Oil: Waiting for the Cuts (212) 902-3307
n The oil market has digested the OPEC and non-OPEC cut
announcements and focus is shifting to the current lackluster Jeffrey Currie
(212) 357-6801
fundamentals with higher OPEC and FSU supply offsetting jeffrey.currie@gs.com
strong demand growth. We expect that the potential ramp Goldman, Sachs & Co.
up in Libya and a stronger dollar will likely further limit the
Abhisek Banerjee
near-term upside to prices and our December WTI price +44 20 7774-8190
forecast remains $50/bbl. There will be little evidence of abhisek.banerjee@gs.com.
production cuts until mid to late January which we believe
will be the next catalyst for the next large move in prices, Chris Mischaikow
which in our view will be higher to $55/bbl. (212) 902-3053
chris.mischaikow@gs.com
n A potential 350 kb/d increase in Libya production represents Goldman, Sachs & Co.
a downside risk to this $55/bbl WTI forecast but its uncertain
Huan Wei
timing, lingering local opposition and the ongoing political (212) 357-2353
instability in the country lead us to maintain our 600 kb/d huan.wei@gs.com
production forecast for now. Ultimately, our work on Saudi
Arabias fiscal balance suggests that the kingdom has a
strong incentive to cut production to achieve a normalization
of inventories, even if it requires a larger unilateral cut,
consistent with comments last weekend by the energy
minister. Given this incentive to cut and in light of the OPEC
and non-OPEC cuts announced over the past two weeks, we
are slightly raising the 1H17 production declines that we
project from the participating producers. We expect 84%
compliance to the 1.6 mb/d country level announced cuts
(which are lower than the 1.8 mb/d headline cuts) from
October 2016 IEA crude production levels.
n These greater projected cuts and our strong demand growth

forecast lead us to forecast a normalization in inventories and
backwardation across the forward curve by next summer. For
WTI and Brent spot prices to materially rise above current
forwards, we believe that OECD stocks will need to visibly
and meaningfully draw down and we expect this to occur in
2Q17. As a result, we are raising our 2Q17 WTI price forecast
to $57.5/bbl from $55/bbl previously ($59/bbl Brent). Beyond
1H17, we expect that the global market will remain balanced,
with Brent prices between $55/bbl and $60/bbl, on higher
production from low-cost producers, a greater shale supply
response and the continued ramp up in legacy projects. As a
result, we are smoothing out our medium-term price
forecast, with our 2H17 and 2018 Brent forecast now $58/bbl
($55/bbl for WTI) from $51.5/bbl and $63/bbl previously.
Page 30
Regional Summaries
Page 32
US Economics Analyst Jan Hatzius

(212) 902-0394
2017 Outlook: Under New jan.hatzius@gs.com

Management Zach Pandl

(212) 902-5699
zach.pandl@gs.com
n
The prospects for significant changes in policy under the new
administration and an economy moving into the later stages of the Alec Phillips
business cycle implies high uncertainty, and an especially (202) 637-3746
alec.phillips@gs.com
interesting US economic outlook this year. We think the odds of a Goldman, Sachs & Co.
recession over the next 1-2 years continue to look relatively low,
David Mericle
and see signs of firming growth in recent datalikely helped by a
(212) 357-2619
more favorable impulse from financial conditions. david.mericle@gs.com
n
Any fiscal stimulus from the next administration would be an added
tailwind for 2017 growth, and we think meaningful tax and spending Daan Struyven
legislation is likely next year. However, we would caution that (1) (212) 357-4172
daan.struyven@gs.com
the current fiscal backdrop may limit the scope for large deficit- Goldman, Sachs & Co.
financed tax cuts or spending increases, (2) aspects of the Trump
agenda, such as trade restrictions, are less favorable for growth, Karen Reichgott
(212) 855-6006
and (3) the economy is already operating close to full employment, karen.reichgott@gs.com
which limits the possible upside to growth without generating Goldman, Sachs & Co.
higher inflation.
Avisha Thakkar
n A healthy demand backdrop and shrinking excess supply suggests (917) 343-4543
avisha.thakkar@gs.com
that wage growth and consumer price inflation should continue to Goldman, Sachs & Co.
firm in 2017. By the end of next year we expect core and headline
PCE inflation to reach the Feds target of 2.0%, and for PCE inflation Elad Pashtan
to moderately exceed policymakers objective in 2018-2020.
n With the economy approaching full employment and inflation
moving towards target, the FOMC will be motivated to continue
raising the funds rate. We see a high probability (90%) of a rate
increase at the upcoming December meeting, and forecast three
hikes during 2017, putting the funds rate range at 1.25-1.50% by the
end of next year. Risks are likely tilted moderately to the downside,
due to (1) a higher degree of dollar sensitivity to policy rate changes
and (2) possibly a higher tolerance by the FOMC to let inflation run
above its target.
n For most of the last eight years, policymakers have been solely
focused on shoring up the recovery; today they also must consider
the risk of overdoing it. Given above-trend growth, and with the
prospect of fiscal stimulus, we see the US economy moving into
modest disequilibrium over the next 1-2 years, with an
unemployment rate falling below its long-run sustainable rate, and
inflation rising above the Feds target.
Page 34
2017 US Equity Outlook: Democracy David J. Kostin

(212) 902-6781
in America and the Triumph of Hope david.kostin@gs.com
over Fear Ben Snider

(212) 357-1744
n
ben.snider@gs.com
US equity investors have focused "more on hope than fear" Goldman, Sachs & Co.
since Donald Trump's election. Ironically, many commentators
Arjun Menon
believe his campaign rhetoric focused "more on fear than hope." In
(212) 902-9693
2017, we expect the stock market will be animated by competing arjun.menon@gs.com
views of whether economic policies and actions of President Trump Goldman, Sachs & Co.
and a Republican Congress instill hope or fear. Brett Sanchez
n "Hope" will dominate through 1Q 2017 as S&P 500 climbs by (801) 884-4794
brett.sanchez@gs.com
9% to 2400. The inauguration occurs on January 20 and our Goldman, Sachs & Co.
Washington economist expects much legislation will be proposed
during the first 100 days. The prospect of lower corporate taxes, Ryan Hammond
(212) 902-5625
repatriation of overseas cash, reduced regulations, and fiscal ryan.hammond@gs.com
stimulus has already led investors to expect positive EPS revisions. Goldman, Sachs & Co.
Instead of our baseline adjusted EPS growth of 5% to $123,
Cole Hunter, CFA
growth could accelerate to 11% and reach $130, which would (212) 357-9860
support a P/E multiple above 18x. Top "Hope" investment cole.p.hunter@gs.com
recommendations: (1) Cyclicals vs. Defensives; (2) Stocks with
high US versus foreign sales exposure; and (3) High tax rate
companies.
n "Fear" is likely to pervade during 2H and S&P 500 will end 2017
at 2300, roughly 5% above the current level. Our economists
expect inflation will reach the Fed's 2% target, labor costs will be
accelerating at an even faster pace, and policy rates will be 100 bp
higher than today. Rising inflation and bond yields typically lead to a
falling P/E multiple. Congressional deficit hawks may constrain Mr.
Trump's tax reform plans and the EPS boost investors expect may
not materialize. Potential tariffs and uncertainty around other policy
positions may raise the equity risk premium and lead to lower stock
valuations in 2H. The median stock trades at the 98th percentile of
historical valuation based on an array of metrics. Top "Fear"
investment recommendations: (1) Low vs. High labor cost
companies; and (2) Strong vs. Weak Balance Sheet stocks.
n Money flow represents a potential upside to our baseline
forecast. Equity mutual fund and ETF inflows may benefit as
investors lose money owning bonds. After years of active
management underperformance and outflows, higher return
dispersion will increase the alpha opportunity for investors skilled
enough to capture it. Economic policy uncertainty and the later
stages of the economic cycle are typically associated with higher
stock return dispersion.
Page 36
European Economics Analyst Huw Pill

+44 20 7774-8736
Europes Outlook: A Fiscal Fillip huw.pill@gs.com

Sustains the Modest Recovery Andrew Benito

+44 20 7051-4004
andrew.benito@gs.com
n
The Euro area's modest recovery during 2015 and 2016 owed to
support from a weaker Euro, lower oil prices and an easing in Alain Durr
domestic financial conditions. However, with the impulse from a +33 1 4212-1127
alain.durre@gs.com
depreciated currency and energy prices dissipating, and little Goldman Sachs Paris Inc. et Cie
headroom for further easing in credit conditions now that bank
Lasse Holboell Nielsen
lending rates in the periphery have re-converged to core levels, the
+44 20 7774-5205
broad-based support for Euro area growth is fading. lasseholboell.nielsen@gs.com
n
Nevertheless, we expect the Euro area to keep on growing at
slightly below 1% over the forecast horizon (more specifically at Adrian Paul
+1.4%yoy in 2017 and 2018, and at +1.5%yoy in 2019 and 2020). +44 20 7552-9958
adrian.paul@gs.com
The reason for this resilience: easier fiscal policy will underpin the Goldman Sachs International
Euro area recovery.
n
Pierre Vernet
Next year we expect fiscal policy to contribute 0.5pp to Euro area +44 20 7552-0428
GDP growth. Prima facie, with headline 2017 GDP growth at pierre.vernet@gs.com
+1.4%yoy, the relative contribution from fiscal easing in 2017
seems modest. However, given that potential growth is likely just Timothy Munday
below 1.0%yoy, at least in an accounting sense fiscal policy is +44 20 7774-8294
timothy.munday@gs.com
responsible for almost all above-trend growth. Goldman Sachs International
n Fiscal policy's increasingly important role in supporting the Euro
Dirk Schumacher
area outlook is facilitated by ECB asset purchases and the 'fiscal Goldman Sachs AG
space' they create on heavily-indebted governments' balance
sheets. Looking forward, we continue to expect the need to cap
peripheral yields in an environment of lacklustre nominal growth
and high debt to GDP ratios so as to maintain fiscal space to lead
the ECB to extend its purchase programme.
n More specifically, we expect the ECB to announce an extension of
its asset purchase programme until end-2017 at its December
meeting. Should the scarcity of eligible assets in some market
segments become a constraint, the existing self-imposed limits on
purchases will be relaxed, with a move away from the capital key
doing the heavy lifting. But the recent global fixed income sell-off
has relaxed these constraints, at least temporarily, giving Mr. Draghi
some respite from having to introduce such politically sensitive
measures.
Page 38
Strategy Matters
Europe Portfolio Strategy Outlook Peter Oppenheimer

+44 20 7552-5782
2017: Reflation Dislocations peter.oppenheimer@gs.com

2017 in 10 key points Sharon Bell, CFA

+44 20 7552-1341
1) Fat & Flat has been our mantra for the market all year given high sharon.bell@gs.com
valuations and weak profit growth at the outset. Within a relatively
flat market there have been wide swings of leadership at the sector level Lilia Peytavin
that have moved alongside bond yields and inflation expectations. We +44 20 7774-8340
lilia.peytavin@gs.com
believe returns will be more positive in 2017, but without such Goldman Sachs International
dramatic sector dispersion. We seek to find the remaining valuation
Jim McGovern
dislocations and macro themes following the reflation rotation in 2H
(801) 741-5572
2016. james.mcgovern@gs.com
2) We forecast European EPS to grow 12% in 2017 and 5% in 2018,
boosted by the commodity sector and financials. Without these sectors, Alessio Rizzi
+44 20 7552-3976
we expect earnings to grow 5% in 2017 and 4% in 2018. Our 12-month alessio.rizzi@gs.com
target prices are 360 for the SXXP and 3,250 for the SX5E, implying Goldman Sachs International
returns of 5% and 7% respectively (9% and 11% with dividends).
Christian Mueller-Glissmann, CFA
+44 20 7774-1714
3) July probably marked the 'end of the affair' that investors have christian.mueller-glissmann@gs.com
had with bonds for 35 years. While we are unlikely to see a rapid rise Goldman Sachs International
in bond yields from current levels, the turning point itself, and the
Ian Wright
moderating deflation risk premium, has been the key driver of the +44 20 7774-2600
rotation we have seen since July. ian.wright@gs.com
4) How far can bond yields rise before hurting equities? There are
three drivers we consider; the relative movements between bond yields
and earnings growth expectations, the level of bond yields and also the
valuation of bonds (how far away from 'fair value'). The rise in yields has
already started to push the P/E lower via a de-rating of defensives.
Our assessment is that US 10-year yields above 2.75% and/or
German yields of between 0.75 and 1% would be more problematic
for equity levels.
5) How long can the leadership rotation last? In recent years the
persistent decline in growth and inflation expectations has resulted in:
(1) defensives outperforming cyclicals; (2) 'growth' outperforming 'value';
and (3) low volatility stocks outperforming. These styles have all reversed
since July.
6) The most extreme beta in the market to the deflation/reflation

inflection point is the performance of financials vs. consumer
staples (the European 'bond proxy'). We think this rotation has some
way further to go and we are overweight banks and underweight
staples.
Goldman Sachs Strategy Matters
7) Outside of these two groups the valuation spreads between cyclicals &
defensives has closed. The speed of the rebound suggests that there is little room
for general cyclical outperformance, and that the main valuation dislocations are
defensive sectors such as pharmaceuticals, telecoms & utilities - we are OW these.
8) Given we see much slower rises in bond yields from here, the extreme binary
sector moves in the markets are unlikely to continue. Stock dispersion should rise
vs. sector dispersion, and themes should gain prominence. We continue to like
baskets of stocks with US and dollar exposure (GSSTAMER) and baskets of
companies which are beneficiaries of infrastructure spend (GSSTINFR).
9) We would emphasise that with narrower valuation spreads in the market,

investors should enjoy increased alpha from stocks with a reasonable yield that have
dividend growth - a total return strategy; (GSSTHIDY) - while these stocks have a
reasonable yield their performance is positively correlated with inflation
expectations.
10) We like EURO STOXX 50 2018 dividends. The dividend term structure is
inverted, pricing negative dividend growth for the coming years both due to poor
fundamentals in recent years and structural excess supply of dividend risk. EURO
STOXX 50 dividends have little duration risk and a declining beta shorter-dated
dividends should offer better risk-adjusted returns than equities.
Exhibit 1: Our forecasts and strategy recommendations

Asia Economics Analyst Andrew Tilton

+852 2978-1802
EM Asia Outlook: Global Reflation andrew.tilton@gs.com

Goldman Sachs (Asia) L.L.C.
Meets Chinas Bumpy Deceleration Goohoon Kwon, CFA

+852 2978-0048
goohoon.kwon@gs.com
n
The global growth backdrop appears to be improving, with policy
conditions (particularly fiscal policy) becoming more stimulative in the Yu Song
developed world. US President-elect Trump seems likely to +86 10 6627-3111
yu.song@ghsl.cn
accelerate the shift towards fiscal stimulus, though a continuation of Beijing Gao Hua Securities Company
the sharp rise in interest rates and the US dollar since the election Limited
could have less positive effects on emerging Asia, as would any
MK Tang
protectionist measures the new US administration implements. +852 2978-6634
China and parts of Southeast Asia seem most likely to be negatively mk.tang@gs.com
affected by the combination of higher rates, a stronger dollar, and
higher US trade barriers. Danny Suwanapruti
n
+65 6889-1987
China should continue its bumpy deceleration in 2017. The danny.suwanapruti@gs.com
challenges of maintaining high growth while attempting to fend off Goldman Sachs (Singapore) Pte
financial and other risks are likely to intensify in 2017 and will require
Jonathan Sequeira
continued strong fiscal and credit supportwhich we believe +852 2978-0698
authorities will be willing to provide. As policymakers growth goals jonathan.sequeira@gs.com
become increasingly challenging in light of lower supply-side
potential output, some secondary policy targets may need to flex. Vishal Vaibhaw
Inflation could rise as currency depreciation (we forecast USDCNY at +91 22 6616-9376
vishal.vaibhaw@gs.com
7.30 at end-2017) and ongoing fiscal/credit stimulus shift price Goldman Sachs India SPL
pressures to the upside.
n
Nupur Gupta
For the smaller open economies of Asia, the benefits from better +65 6654-5438
growth in the rest of the world may be limited by export competition nupur.x.gupta@gs.com
from a slowing and depreciating China, as well as the possibility of Goldman Sachs (Singapore) Pte
greater US protectionism. These economies could also face Zhennan Li
challenges from a rising global rate environment. +852 2978-6128
zhennan.li@gs.com
n The large, young, lower-income economies of India, Indonesia, and Goldman Sachs (Asia) L.L.C.
the Philippines have higher growth potentialin theory. But in
Maggie Wei
practice, much will depend on domestic policy and the pace of +852 2978-0106
economic reform. In this regard, we continue to see India as the maggie.wei@gs.com
most promising, with last weeks major currency reform providing an Goldman Sachs (Asia) L.L.C.
emphatic demonstration of the Modi administrations reform Mallika Chawla
commitmentalbeit at the price of serious short-term disruption. +65 6654-5539
mallika.chawla@gs.com
Goldman Sachs (Singapore) Pte
Irene Choi
+82 2 3788-1722
irene.choi@gs.com
Goldman Sachs (Asia) L.L.C., Seoul
Branch
Page 42
Asia-Pacific Strategy Timothy Moe, CFA

+852 2978-1328
2017 Outlook: A Reflationary Rose, timothy.moe@gs.com

with Thorns Richard Tang, CFA

+852 2978-0722
richard.tang@gs.com
Moderate regional returns
We expect 9% USD total return for MXAPJ in 2017, driven by high-single Sunil Koul
digit EPS growth, little overall valuation change, 2% fx depreciation and +852 2978-0924
sunil.koul@gs.com
a 3% dividend yield. Performance may be back-loaded notwithstanding Goldman Sachs (Asia) L.L.C.
US fiscal stimulus, due to softer sequential 1Q17 China growth and the
effects of Indias demonetization. Our 3, 6 and 12m targets are now Kinger Lau, CFA
+852 2978-1224
435, 445 and 455 (previously 470 each). kinger.lau@gs.com
Themes: the good, the bad and the unique Nitin Chanduka, CFA
Reflation - A global cyclical upturn appears underway, spurred by US fis- +65 6654-5445
cal stimulus. Asian earnings are recovering after six years of stagnation, nitin.chanduka@gs.com
helped by the reflationary impact of firmer commodity prices. Thorns -
the price of pro-growth US policy is higher US rates, a stronger dollar, Ki Cheong Wong, Ph.D
and potential trade tariffs. These have adverse effects on Asian equity +65 6654-5393
kc.wong@gs.com
returns through various channels. Unique Asia- Factors other than Goldman Sachs (Singapore) Pte
global ones will impact regional markets. Monetary policy continues to
diverge from the US, China remains in a bumpy deceleration, and in Alvin So
+852 2978-1585
our view India will suffer in the near-term from demonetization but alvin.so@gs.com
should reap reform benefits later. Goldman Sachs (Asia) L.L.C.
John Kwon
Allocation: reflation and domestic demand +65 6654-6337
We start 2017 overweight Australia (upgrade), India, Indonesia and the jongmin.kwon@gs.com
Philippines. These are the best expressions of global and Asia-specific
themes. We lower China to market weight given near-term macro chal-
lenges and focus on intra-market opportunities. We also market weight
Hong Kong, Singapore (upgrade) and Thailand (upgrade). Underweights
are Korea (downgrade), Malaysia and Taiwan (downgrade). Our sector
views tilt towards reflation.
Implementation
Our investment ideas reflect our themes. 1) Reflation trades: infra-
structure investment, GARP. 2) Thorn trades: monetary policy
winners/losers, CNY depreciation winners/losers. 3) Unique Asia
trades: India recovery basket, Asia domestic demand stocks.
Page 44
Japan Economics Analyst Naohiko Baba

+81 3 6437-9960
We Forecast Stable 1%+ GDP naohiko.baba@gs.com

Growth in 2017 Tomohiro Ota

+81 3 6437-9984
tomohiro.ota@gs.com
We published our global economic outlook for 2017 on November 16.
We forecast real GDP growth of +3.5% for the global economy in 2017, Yuriko Tanaka
accelerating from +3.0% in 2016. We identify as key risk factors the +81 3 6437-9964
yuriko.tanaka@gs.com
uncertainties surrounding the incoming US administration and the Goldman Sachs Japan Co., Ltd.
impact of potential higher US interest rates on emerging economies. For
Japan, we forecast +1.2% growth in 2017, up from +0.8% in 2016. Key
points for Japans 2017 outlook are as follows:
n The economy has been seesawing for a couple of years, but we
believe signs of a modest recovery are beginning to emerge. We look
for real GDP growth of +1.2% in 2017, with support from fiscal
stimulus and modest recoveries in consumer spending amid benign
external demand environments.
n We forecast core CPI inflation of +0.2% yoy in 2017. While this would
represent acceleration from -0.3% in 2016, it is still well short of the
BOJs 2% target. That said, we think the BOJ is unlikely to apply
additional easing measures in 2017 unless it needs to counter any
sharp appreciation in yen.
n Instead, the BOJs 0% target on 10-year yield could potentially
become difficult to sustain in case the UST yield rises towards 3%.
In our view, the BOJ will try to stick with its 0% target throughout
2017 while adopting rhetoric suggesting that deviation from the
target within a tolerable range is acceptable. However, we think
questions could arise on the BOJs controllability of the 10-year yield
and, furthermore, whether such control is desirable.
n As a result of the US presidential election, we expect the uncertainty
regarding US trade and immigration policies to be heightened.
n For Japan, the near-term issues will be Mr. Trumps opposition to the
TPP and his assertion that Japan should bear the entire cost of the
US military force in Japan, as stated during his election campaign.
For both, however, we think the economic impact on Japan will not
be significant.
n In our view, much greater risk would be if the Trump administration
chooses to take a hard line protectionism trade policy, thus
dampening global trade activities, and if there is a fundamental
change in the US-Japan security treaty. While we currently think this
outcome is unlikely, we view it as a long-term tail risk.
Page 46
Japan Portfolio Strategy

Kathy Matsui
Japan Strategy 2017: Reflation +81 (3) 6437-9950
kathy.matsui@gs.com
Rotation Goldman Sachs Japan Co., Ltd.
Hiromi Suzuki
Upside in the Year of the Rooster +81 (3) 6437-9955
hiromi.suzuki@gs.com
Despite a challenging 2016, Japan remains one of the best-performing Goldman Sachs Japan Co., Ltd.
developed markets since Abenomics began in 2013, driven entirely by
Kazunori Tatebe
earnings rather than multiple expansion. For 2017, we believe the +81 (3) 6437-9898
risk/reward balance is favorable, and our new 12-month TOPIX target is kazunori.tatebe@gs.com
1660, or Nikkei 225: 21,000,* implying potential upside of 7% (9% with
dividends). Our outlook rests on four pillars: a favorable macro backdrop
led by fiscal stimulus, continued earnings growth, additional structural
reforms, and a favorable flow of funds. 2017 could see equities finally
decouple from the yen, but the key will be domestic demand.
Implementation Strategies: Reflation, defense, M&A

While we project upside for TOPIX, we see even more interesting
opportunities beneath the index surface, and highlight three themes: (1)
Reflation: given our more constructive outlook for inflation, commodities
and infrastructure spending, we upgrade Banks, Trading, Energy, and
Machinery to overweight, and recommend America-exposed Japan stocks
(GSJPAMRC) and high-oil price beneficiaries (GSJPHOIL); (2) Defense: we
see scope for expanded defense expenditures (GSJPDFSE); and (3) M&A:
Excessive corporate cash and the need for industry consolidation will likely
boost M&A activity, and we highlight related stocks.
Exhibit 1: Improving fundamentals to support upside in 2017TPX target: 1660

Based on TSE1-listed firms with consolidated data available from March 2009. GS Global
Investment Research estimates for FY3/17, FY3/18, and FY3/19.
Source: Company data, Goldman Sachs Global Investment Research
* TOPIX and Nikkei 225 forecasts as of Dec. 21, 2016.

Page 48
China
Kinger Lau, CFA
2017 Portfolio Strategy Outlook: +852-2978-1224

kinger.lau@gs.com
Global Politics Reflate Old China Timothy Moe, CFA
+852-2978-1328
Politics drives economics in 2017 timothy.moe@gs.com
The incoming US government and the leadership transition in China
will plot the macro story for Chinese equities in 2017, potentially Jack Wang
leading to reflation and higher rates globally, a strong commitment to +852-2978-1220
jack.wang@gs.com
uphold growth in China, but more Rmb weakness, in our view.
Specifically, our economists forecast GDP to grow 6.5% in 2017 (CAI at
4.9%) and CPI inflation to rise 30bps in China, US bond yields to go up Si Fu, Ph.D.
40bps, and the Rmb (fixing) to weaken to 7.3 vs. the USD by end-17. +852-2978-0200
si.fu@gs.com
Moderate index upside; potential air pocket in 1Q; lower to MW
to start
Our macro, earnings, and valuation forecasts drive end-17 targets for
MSCI China and CSI300 at 66 and 4000, implying 8% and 14% potential
returns. Earnings growth should recover in 2017 to 8% (highest in 4
years) amid firmer inflation, but valuation upside looks limited when rates
rise, especially for New China equities. Light investor positioning and
strong Southbound potential could alleviate possible weakness from EM
flows while renewed asset reallocation demand could buttress A-share
liquidity. We expect a slow start to 2017 on slower sequential growth
(5.5% in 1Q), temporary fiscal drag, and capital outflows, warranting a
defensive tilt (China from OW to MW) and a preference for A over H
to start the year.
Old China strikes back; 4 Rs for 2017

We raise Energy and Staples to OW, and lower Tech to MW to position
for reflation cyclicality. Thematically, we would build our portfolio around
four axes, all starting with R: (1) Reflation beneficiaries, (2) Resilience
in New China, (3) Reform (SOE) beneficiaries, and (4) Rmb
depreciation winners.
Page 50
Latin America Economics Analyst Alberto Ramos

(212) 357-5768
Latin America 2017-2020 alberto.ramos@gs.com

Macroeconomic Outlook: Time Mauro Roca

(917) 343-9586
to Get Moving and Start Shaping the mauro.roca@gs.com

Future! Diana Ayala

(212) 357-5913
diana.ayala@gs.com
Macro Picture to Improve Modestly in 2017 Goldman, Sachs & Co.
Following 2015-16's undistinguished performance, we expect LatAm's
macroeconomic picture to improve, modestly, in 2017back to positive
growth after two years of contracting real GDP, moderating inflation,
declining policy rates in most places, and moderately lower twin fiscal and
current account deficits. Overall, we expect aggregate regional growth to
recover to 1.7% in 2017, from a projected 1.2% contraction in 2016, driven
chiefly by the end of the deep recessions in Argentina and Brazil, and a
very mild firming of growth in the small-open Andean economies. In
addition, policy interest rates are expected to decline in most countries,
given the expected moderation of the intense inflationary pressures that
swept the region in 2015-16. The forecasted improvement in economic
performance takes place off an admittedly undemanding comparative
base (of negative growth and double-digit inflation) and will likely fall far
short of the regions potential.
Fiscal Consolidation Needed Across the Region

Given the expected evolution of the external macro and financial
environment, as in 2016, LatAm is not expected to benefit from significant
balance of payments flows (current and/or capital account) to power up its
economic recovery. The forecasted slight improvement in the macro
outlook is far from guaranteed, inasmuch as it is contingent on the
implementation of disciplined macro policies, and in most places tangible
progress on key reforms, particularly on the fiscal side in order to stabilize
deteriorating public sector debt dynamics.
Tangible Progress on Key Reforms Needed For Sustained

Development
LatAms future can certainly be more appealing, but only if the authorities
return to a sustainable fiscal path and embrace far-reaching structural
reforms to improve productivity and elevate the regions still-limited
growth potential. Therefore, across large swaths of LatAm the challenge
remains to boost domestic savings and investment (particularly by the
public sector) and to identify endogenous engines of growth, so as to
finally overcome the regions perennial dependence on commodity prices
and capital inflows to grow and develop.
Page 52
CEEMEA Economics Analyst Kevin Daly

+44(20)7774-5908
CEEMEA Outlook A Moderate kevin.daly@gs.com

Improvement in Growth, Clemens Grafe

+7(495)645-4198
Weak Inflation, Dovish Policy clemens.grafe@gs.com

OOO Goldman Sachs Bank
Andrew Matheny
n The latest activity data for CEEMEA economies are consistent with +7(495)645-4253
an improvement in growth across the region as a whole. According andrew.matheny@gs.com
OOO Goldman Sachs Bank
to our Current Activity Indicators (CAIs), the CEEMEA region grew at
an annualised pace of +2.8% in the three months to October, vs. an Sara Grut
average growth rate of +0.8% annl. in the first six months of the +44(20)7774-8622
sara.grut@gs.com
year. Our CAIs imply that the CEE-4 grew at a +4.2% pace, Russia Goldman Sachs International
+2.3%, Turkey +2.5% and South Africa +1.0%.
n We expect growth in CEEMEA to remain decent but unspectacular.
There remains considerable support to activity from the large easing
in financial conditions that has taken place in the past 18 months. We
also expect the divergence between commodity-importing and
commodity-exporting economies to diminish, as the effects of past
energy price declines fade. Reflecting this view, our growth forecasts
for 2017 are above consensus on Russia and South Africa.
n Inflation has surprised consistently on the downside throughout
CEEMEA in 2016. Initially these surprises were driven by weaker-
than-expected energy prices but, more recently, core inflation has
also played a role. Reflecting these dynamics, we have lowered our
inflation forecasts again, with large downward revisions in South
Africa. Our 2017 inflation forecasts are generally below consensus,
notably so for Russia and South Africa.
n We envisage some convergence in inflation rates between high-
inflation economies (Turkey, Russia and South Africa) and 'low-flation'
economies (Poland, Hungary, Czech Republic, Romania and Israel). In
the short run, we view this convergence as being driven by the
fading effects of past exchange rate depreciations in the high-inflation
economies but, over time, we also expect differences in spare
capacity to play a role.
n Reflecting the weakness of inflation dynamics, the outlook for
monetary policy appears dovish across CEEMEA, with easier policy
in the high-inflation economies and the maintenance of low rates in
the low-flation economies. Our views on monetary policy are more
dovish than the consensus and the forwards in South Africa
(reflecting our views on lower inflation).
Page 54
Australias 2017 Economic Outlook Tim Toohey

+61(3)9679-1079
Australias Role in a World of Reflation tim.toohey@gs.com
Goldman Sachs Australia Pty Ltd
As we look out to 2017 and beyond, we believe Australia has moved Andrew Boak, CFA
through an important transition point and with it has emerged the +61(2)9321-8576
andrew.boak@gs.com
prospect of stronger and less volatile real economic growth. We have Goldman Sachs Australia Pty Ltd
upgraded our economic growth forecasts for Australia and now
forecast Australias economic growth will average 2.8% in 2017, Bill Zu
+61(3)9679-1855
2.9% in 2018, 3.0% in 2019 and 3.3% in 2020. This represents a 40ppt bill.zu@gs.com
upgrade in 2017, a 10ppt upgrade in 2018 and a 50ppt upgrade in Goldman Sachs Australia Pty Ltd
2019. We have also upgraded our A$/US$ forecasts from 0.75, 0.73,
0.72 on a 3, 6 and 12 month view to 0.78, 0.77 and 0.75,
respectively.
n A sharp turn in Australia's national income dynamic, which we

flagged in early August, now looks likely to move significantly higher
following the spikes in coal and iron ore prices in the closing months
of 2016. Although we expect prices to fall from current levels for
these commodities, the recent surge transforms our expectation
for a modest rise in Australia's terms of trade in 2017 to a
material 8% gain with most of the export price spike to be
registered in late 2016 an early 2017. This is likely to set off a
chain of events through the Australian economy in coming
months. The resulting surge in national income should be reflected
via much stronger mining profits, a large taxation windfall for the
Federal government (and elimination of the threat of a sovereign
downgrade), a restarting of idle capacity in the coal sector, a better
climate for broader business investment and ultimately better
employment and wage outcomes. It also sows the seeds for a more
material handover of the economic growth baton to the private
sector, and importantly this transition can proceed despite our
forecast of a sharp decline in new dwelling investment in 2017-18.
Perhaps the most dramatic transformation will come via
Australia's external accounts with a run of trade surpluses now
in prospect for 2017 indeed the combination stronger
commodity prices and the ramp-up of LNG production suggests
Australia will post the largest trade surpluses as a share of GDP
during 2017 since any time since the early 1970s. Ultimately the
state of the external accounts is the truth serum for the currency,
and as such we acknowledge clear upside risk to the A$ from current
levels.
n How will the RBA respond? We continue to forecast that the
RBA will commence increasing interest rates from 1Q18;
however, the skew is now towards an earlier kick-off in 2H17.
Much will depend upon the response of the A$ and other asset
prices that we capture in our financial conditions index.
Goldman Sachs Australias 2017 Economic Outlook
Of particular interest is that since the 1 September our financial conditions index
has moved from a contractionary setting into expansionary territory for the first
time in over 12 months. The negative impact from rising bond yields has been
more than offset by narrowing credit spreads and rising commodity prices. At this
stage the Australian economy has ample spare capacity in product and labour
markets and a low starting point for inflation. While this suggests the RBA has
time on its side before recalibrating interest rate settings, the RBA's focus has
increasingly shifted under the stewardship of Governor Lowe towards minimizing
risks in the financial cycle rather than just the economic cycle. On this score, the
RBA may begin to question the rationale for keeping official interest rates at a
record low of 1.5%. At this stage we have kept our forecast for the RBA to
commence its hiking cycle in 1Q18 with the RBA forecast to increase interest
rates 75bps through 2018 and a further 75bps spread over 2019 and 2020 to a
3.0% cash rate. Nevertheless, the risk of the RBA increasing the cash rate in
2H17 has risen materially and the evolution of financial conditions, house prices
and underlying inflation will ultimately guide the decision.
Key forecast changes for Australia
Exhibit 1: Strong economic growth, improved business investment outlook, higher inflation, narrower CAD

New Zealands 2017 Economic Outlook Tim Toohey

+61(3)9679-1079
The Path to Higher Rates tim.toohey@gs.com

n The New Zealand economy expanded no less than +3.6%yoy to Andrew Boak, CFA
+61(2)9321-8576
2Q2016 - well beyond our expectations and growth reported across andrew.boak@gs.com
NZs major OECD peers. Ahead, our base case is that this Goldman Sachs Australia Pty Ltd
momentum is sustainable and our +3.7% GDP forecast for 2017 is
Bill Zu
+70bp above consensus. +61(3)9679-1855
n
bill.zu@gs.com
Our optimism reflects a favourable mix of accommodative financial
conditions, a sizeable upgrade to the outlook for the construction
cycle, ongoing tailwinds to consumer & tourism spending, stronger
election-year fiscal spending, an ~66% increase in dairy prices,
and our forecast for global industrial reflation. However, as the
'free-kick' to growth from record strong net migration continues to
taper, we expect this will contribute to both slower growth beyond
2017 and intensifying capacity constraints in the interim. In turn, we
view the risks to the RBNZs inflation forecasts as skewed to the
upside.
n Ultimately, this does not look to us like an economy in need of
additional monetary stimulus nor the NZD significantly overvalued.
Indeed, given excessive growth in house prices, stalled progress
on debt-to-income macroprudential constraints, and the prospect of
fiscal pump-priming - risks to sustainable growth and financial
stability remain in focus. In our view, NZs overall risk profile is
evolving to be consistent with a gradual process to normalize policy
settings commencing sooner than most expect from November
2017.
n As a small, open, high-yielding and commodity-exposed economy,
key risks include the global cross currents from increased
protectionism, a tapering in the 'search for yield', a China slowdown,
and/or global reflation. Domestically, the 14 November earthquake
was a reminder that NZs macro outlook can transform both rapidly
and unexpectedly.
Equity baskets disclosure

The ability to trade the basket(s) in this report will depend upon market conditions,
including liquidity and borrow constraints at the time of trade
MSCI
All MSCI data used in this report is the exclusive property of MSCI, Inc. (MSCI).
Without prior written permission of MSCI, this information and any other MSCI
intellectual property may not be reproduced or redisseminated in any form and may
not be used to create any financial instruments or products or any indices. This
information is provided on an as is basis, and the user of this information assumes
the entire risk of any use made of this information. Neither MSCI, any of its affiliates
nor any third party involved in, or related to, computing or compiling the data makes
any express or implied warranties or representations with respect to this information
(or the results to be obtained by the use thereof), and MSCI, its affiliates and any
such third party hereby expressly disclaim all warranties of originality, accuracy,
completeness, merchantability or fitness for a particular purpose with respect to any
of this information. Without limiting any of the foregoing, in no event shall MSCI, any
of its affiliates or any third party involved in, or related to, computing or compiling the
data have any liability for any direct, indirect, special, punitive, consequential or any
other damages (including lost profits) even if notified of the possibility of such
damages. MSCI and the MSCI indexes are service marks of MSCI and its affiliates.
The Global Industry Classification Standard (GICS) were developed by and is the
exclusive property of MSCI and Standard & Poors. GICS is a service mark of MSCI
and S&P and has been licensed for use by The Goldman Sachs Group, Inc.
January 2017 Page 58

Disclosure Appendix
Reg AC
Each analysts contribution herein was certified under Reg AC by the analyst primarily responsible for that section as follows: I, Name of Analyst, hereby
certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their
securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views
expressed in this report.
Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs Global Investment Research division.
Disclosures
Distribution of ratings/investment banking relationships
Goldman Sachs Investment Research global Equity coverage universe
Rating Distribution Investment Banking Relationships

Buy Hold Sell Buy Hold Sell
Global 31% 55% 14% 64% 59% 53%
As of October 1, 2016, Goldman Sachs Global Investment Research had investment ratings on 2,921 equity securities. Goldman Sachs assigns stocks
as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for
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See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager or
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Buy (B), Neutral (N), Sell (S) -Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being assigned a Buy or
Sell on an Investment List is determined by a stocks return potential relative to its coverage group as described below. Any stock not assigned as a Buy
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may vary as determined by the regional Investment Review Committee. Regional Conviction Buy and Sell lists represent investment recommendations
focused on either the size of the potential return or the likelihood of the realization of the return.
Return potential represents the price differential between the current share price and the price target expected during the time horizon associated
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Coverage groups and views: A list of all stocks in each coverage group is available by primary analyst, stock and coverage group at
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Not Rated (NR). The investment rating and target price have been removed pursuant to Goldman Sachs policy when Goldman Sachs is acting in an
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MACRO RESEARCH | JANUARY 2017

GS MACRO OUTLOOK 2017

The Goldman Sachs Group, Inc.

Global Economic Outlook: A Catalyst for Tighter Fed Policy..............................................................................7

Global Markets Outlook: Top 10 Market Themes for 2017................................................................................13

Global Cross-Asset Outlook: Reflation Continuation, Risky Rotation...................................................................17

Global Credit Outlook: New Gear, Same Direction...................................................................................................19

January 2017 Page 2

Global FX Analyst 4Q2016: Dollar Reset.....................................................................................................................23

Commodity Watch: Upgrading to Overweight Commodities in 2017....................................................................27

Oil: Waiting for the Cuts.................................................................................................................................................29

US Economic Outlook: Under New Management....................................................................................................33

January 2017 Page 3

European Economic Outlook: A Fiscal Fillip Sustains the Modest Recovery.....................................................37

Europe Portfolio Strategy Outlook: Reflation Dislocations................................................................................39

EM Asia Economic Outlook: Global Reflation Meets Chinas Bumpy Deceleration........................................41

Asia-Pacific Portfolio Strategy Outlook: A Reflationary Rose, With Thorns.......................................................43

Japan Economic Outlook: We Forecast Stable 1%+ GDP Growth in 2017..........................................................45

Japan Strategy 2017: Reflation Rotation....................................................................................................................47

January 2017 Page 4

China Portfolio Strategy Outlook: Global Politics Reflate Old China....................................................................49

Australia Economic Outlook: Australias Role in a World of Reflation.................................................................55

New Zealand Economic Outlook: The Path to Higher Rates.................................................................................57

January 2017 Page 5

Global Economics Analyst Jan Hatzius

A Catalyst for Tighter Fed Policy jan.hatzius@gs.com

Once again, global growth disappointed expectations in 2016. We currently estimate

Exhibit 1: Global Growth Disappointed Expectations in 2016...

Source: Consensus Economics, Goldman Sachs Global Investment Research

Acceleration Already in Train

16 November 2016 Page 8

Exhibit 2: ... But Has Started to Accelerate

Source: Goldman Sachs Global Investment Research

16 November 2016 Page 9

Exhibit 3: Positive Impulse from Financial Conditions in 2017

Source: Goldman Sachs Global Investment Research

16 November 2016 Page 10

Exhibit 4: The GS Global Growth Outlook

Source: Bloomberg, Goldman Sachs Global Investment Research

16 November 2016 Page 11

Global Markets Analyst Charles P. Himmelberg

Higher Growth, Higher Risk, Slightly Francesco Garzarelli

9 The next credit cycle: Kinder and gentler

10 The 'Yellen Call' 2.0: Now with 'contingent

Higher growth, higher risk, slightly higher returns

17 November 2016 Page 14

Exhibit 1: Our global market forecasts for 2017

Source: Goldman Sachs Global Investment Research

17 November 2016 Page 15

Key views across asset classes

Credit: We expect further compression in US and EUR IG and HY cash credit

Exhibit 1: More reflation in our asset allocation

Source: Goldman Sachs Global Investment Research

2 December 2016 Page 18

New Gear; Same Direction Goldman, Sachs & Co.

Our key relative value themes

New risks but no cycle turnaround

New gear; same direction

Tighter spreads in a higher vol regime. We expect spreads will moderately

28 November 2016 Page 20

28 November 2016 Page 21

28 November 2016 Page 22

The Global FX Analyst Robin Brooks

Fourth Quarter 2016: Dollar Reset robin.brooks@gs.com