The electric car revolution

US equities are worth sticking with. # # --------------------------------------------------------------- The key takeaways today: - How the electric car is already redefining the economy - US stocks are expensive — and worth sticking with - Fumio Kishida, Japan's Prime Minister, on a "new form of capitalism" - Markets are stable despite the war in the Middle East - Briefings Brainteaser: Which asset classes are likely to be volatile? --------------------------------------------------------------- Electrified, software-defined cars are upending the global economy Electric vehicles could make up close to half of global car sales by 2035, and our analysts forecast that more advanced autonomous or partially autonomous vehicles could account for a similar share of sales by the same year. It's a fundamental shift, upending labor markets, supply chains, and commodity markets. In [The Future of Four Wheels: How the Auto Industry Is Transforming]( a four-part series from Goldman Sachs Exchanges, we speak with professionals from Goldman Sachs, as well as key people in the automotive industry, to look for clues as to what the electrification of the car will mean for the global economy. Our podcasts series shows cars aren't just replacing internal-combustion engines with electric motors — they're being completely re-engineered. That re-engineering gives auto designers a nearly blank sheet of paper to work with. Meanwhile, established automakers who built reputations around high-performance V8 engines, for example, now are focusing on [battery chemistry]( semiconductors, and software. The newest generation of automobiles has gone from hundreds of individual electronic control units — which do everything from lowering a window to working the brakes — to an integrated system characterized by a single digital operating system. The latter works with sensors and hardware to give the user a set of experiences that can be optimized. Onboard software gets updated over the air, so that some elements of your car get better over time, challenging the notion that a car immediately depreciates the moment it's driven off the dealer lot. As carmakers move toward using fewer mechanical parts and more digital technology, we end up with a driver experience that feels more like a gaming console — or a smartphone. At the same time, [the second episode in our miniseries]( shows that the car has gone from being a fuel-intensive vehicle to one that's heavy in metal: an EV has about six times the mineral content of an internal-combustion engine car. Just like oil, these minerals are concentrated in certain countries. Chile is the Saudi Arabia of copper, with about a third of global production. Peru accounts for another 10%. Three-quarters of the world's cobalt comes from the Democratic Republic of Congo, and more than 60% of the supply of rare earths comes from China. New carmakers, meanwhile, have sprung up around the world, even as traditional auto companies are retooling,[as we recount in the third podcast episode](. China, for instance, has perhaps more than 100 EV makers. The new entrants are creating a product entirely from scratch, optimized for the 21st century. But legacy carmakers have many years of manufacturing experience, not to mention profits from selling gas-fueled cars that they can pour into EV development. Many things about EVs are still in flux — from the software running them, to their battery chemistry, to the supply chains that create their components. We don't have all the answers yet. But, [as we describe in our fourth podcast episode]( we can already start to see how changes in the way we move are also changing the world in which we live. --------------------------------------------------------------- Why clients should stick with US stocks US equities continued to outperform in 2023, with a 26% total return that exceeded non-US developed equities at 19%, emerging markets at 10%, and Chinese equities, which lost 11%. Such strong performance [has pushed US equity valuations into their top historical decile]( meaning US stocks have been cheaper at least 90% of the time. The Wealth Management Investment Strategy Group (ISG) acknowledges that US stocks are expensive, both on an absolute basis and relative to non-US equities. Even so, ISG continues to recommend, in their 2024 Outlook report titled [America Powers On]( that clients maintain a long-term strategic overweight to US equities. They also [recommend staying invested in US equities]( rather than tactically shifting into bonds, cash, or non-US equities. (ISG's forecasts may differ from those of other groups at Goldman Sachs.) US markets are more expensive than equities in almost any other country or region (India is the one exception). But US equities aren't as expensive as they first appear relative to their non-US counterparts. The mix of sectors in a market varies significantly, and this affects its overall valuation. Some sectors are more expensive, such as technology, so an equity market index with a heavy technology weighting will have a higher valuation. Another reason to stay invested in US equities is that valuation differentials haven't historically been a useful signal of countries' future relative performance. ISG also points out that US earnings per share grow faster. ISG expects non-US equities to outperform US equities by about 2 percentage points in 2024. But since these returns are stated in local currency terms, if the dollar appreciates by ISG's expected 2% this year, US and non-US developed equities would actually have similar returns. --------------------------------------------------------------- Japan's Prime Minister: Japan is promoting a "new form of capitalism" “Japan has a golden opportunity to completely overcome low economic growth and a deflationary environment that have persisted for a quarter of a century,” [Japanese Prime Minister Fumio Kishida said]( on January 23 in a keynote address via video message at the Goldman Sachs Global Macro Conference in Hong Kong. The opportunity comes, he said, as the government promotes a “new form of capitalism,” transforming social issues into growth engines, and doing so in close coordination with the private sector. He pointed out that Japan's wage growth, domestic private investment, and the NIKKEI stock market have reached 30-year highs. The prime minister described the government's efforts to create a “virtuous cycle of growth and distribution.” Financial and capital market reforms are designed to shift the $15 trillion of Japanese household savings toward productive investment, which will then help boost corporate value. The benefits of that increase in value will go back to households, leading to more private sector consumption and investment, he said. Kishida also outlined sets of initiatives — including tax exemption schemes for retail investors, corporate governance reforms, as well as asset management reforms and plans for startup financing — to achieve the government's goals. “2024 will be a critical year for the Japanese economy as to whether it may go back to low growth and deflation again, or it can move toward a new economic stage,” he said. “The Government of Japan, in close cooperation with the Bank of Japan, is determined to achieve wage increases above inflation by agile economic management in accordance with economic and price developments.” --------------------------------------------------------------- Amid rising Middle East tensions, markets remain stable While tensions in the Middle East have been rising, the impact on markets has been contained so far. “Markets have consistently shrugged off geopolitical tensions in the Middle East and Ukraine, believing them to be localized in nature,” says Sam Morgan, global head of fixed income currencies and commodities sales in Goldman Sachs' Global Banking & Markets business. He notes that price movements in oil, Treasuries, and other key markets were relatively small in the days after last weekend's drone strikes on US troops. Instead, the markets are more focused on the US election, the US-China relationship, and macro topics such as growth, inflation, and monetary and fiscal policies, Morgan says on [the latest episode of Goldman Sachs Markets](. Even so, there are risks of further escalation in the Middle East, including through an increase in attacks by Iranian-backed proxies like the Houthis and Hezbollah, says Jared Cohen, president of Global Affairs and co-head of the Office of Applied Innovation at Goldman Sachs. And if a certain threshold is crossed, and “you do have some kind of direct confrontation between the US and Iran, it increases the likelihood of a Hezbollah front opening up much more significantly,” he says. And now that the Houthis have a strategic advantage in the Red Sea that they weren't anticipating,” he says, “I see them doing everything possible to continue to push.” --------------------------------------------------------------- Briefings Brainteaser: Big market moves As of January 24, 2024, according to Goldman Sachs Research, markets priced the highest probability of an extreme tail move — larger than a historical 1x standard deviation in either direction over the next 12 months — for US bonds. But which of these asset classes was priced for the lowest probability of a large move? A) European equities B) US equities C) Gold D) Oil [Check the answer here](. --------------------------------------------------------------- Goldman Sachs in the news [Bloomberg]( January 26 The exceptionalism of US equities (6:53) [CNBC]( January 29 Goldman Sachs Asset Management's Elizabeth Burton breaks down market action ahead of key Fed meeting (5:27) --------------------------------------------------------------- --------------------------------------------------------------- Some of the images used in this newsletter are sourced via Getty Images. The opinions and views expressed in this newsletter may not necessarily reflect the institutional views of Goldman Sachs or its affiliates. The information provided in this newsletter is for informational purposes only and does not constitute a recommendation from any Goldman Sachs entity to the recipient. 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