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Goldman Sachs: It's showtime for global growth

After a limp start for equity markets in 2014, investment bank Goldman Sachs has revealed it is bullish for the second quarter, predicting global growth to pick up and shares to follow suit.

"We think that the next couple of months are likely to be dominated by evidence that the growth weakness of the first quarter is giving way to the kind of recovery profile that we expected initially coming into the year," a research team led by Dominic Wilson said in a note released on Thursday morning.

"Our forecasts imply an acceleration in global GDP (gross domestic product) growth, excluding Japan; the U.S. economy is set to bounce back from the drags from weather and destocking; and China's weak start to the year should give way to something a little better, as modest stimulus falls into place."

Traders work at the Goldman Sachs Group Inc. booth on the floor of the New York Stock Exchange (NYSE) in New York.
Peter Foley | Bloomberg | Getty Images
Traders work at the Goldman Sachs Group Inc. booth on the floor of the New York Stock Exchange (NYSE) in New York.

These predictions come after a relatively sanguine time for global equity markets after a promising rally in 2013. U.S. bourses are struggling to keep pace with some of the better performing peripheral European indexes. The Dow Jones Industrial Average has gone in reverse since the start of the year whilst the S&P 500 has notched slims gains of 2 percent.

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After waiting for the "curtain to rise" on the U.S recovery, Goldman believes that time is close at hand. It said that U.S. financial conditions are at their easiest post-crisis levels and the improving cyclical environment should continue to support equities, while pushing bond yields higher. Annualized growth of 1.5 percent in the first quarter over the previous three months will give way to a figure of 3 percent in the second quarter, according to the bank.

In Europe, it maintains its tactical long position on the German DAX Index which has seen slim gains of just 0.75 percent so far this year. Modest easing measures from the European Central Bank is seen as a key driver for this step forward in Europe, Goldman says.

In China, the bank expects a mix of domestic easing and improving external environment to alleviate the weakness seen in the first quarter. Again, growth could pick up and predicts a rise from 5 percent to 7.3 percent in the second quarter.

However, Japan is likely to be the laggard, with a sales tax that was introduced this week expected to cause growth to "fall sharply."

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"We think the reality of a better cyclical picture has not yet been fully priced," Wilson said in the research note. He added that even emerging markets, which have been hit recently with the "tapering" of the U.S. Federal Reserve's bond purchases and Chinese growth concerns, could be ready to bounce back.

"Improving activity – particularly if China is part of it – continues to support EM (emerging markets) and commodity-related assets. Although our structural view of the EM universe is still quite cautious, EM assets could receive further temporary support from the shift to global expansion," he said.

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