Will the Japanese stock rally continue?

EV battery prices are falling rapidly # # --------------------------------------------------------------- The key takeaways today: - As battery prices drop, the demand for EVs will rise — eventually - Can the Nikkei's record rally in Japanese stocks continue? - Making the case for infrastructure as an asset class - How retail CEOs are navigating a more complex environment - Briefings Brainteaser: Which health condition accounts for most working days lost in the US? Was this newsletter forwarded to you? [Sign up now](. --------------------------------------------------------------- Lower battery prices are expected to eventually boost EV demand Goldman Sachs Research [lowered its forecast for growth]( in global battery demand in 2024 to 29% year over year, compared to its [previous projection]( of 35%. Battery demand is estimated to have increased 31% in 2023. The change in outlook comes as US auto executives raise concerns about EV profitability — partly because of price competition among EV makers amid high raw material prices (which have since moderated) — and as EV subsidies are cut in some European markets, write Nikhil Bhandari, co-head of Asia-Pacific Natural Resources and Clean Energy Research, and analyst Amber Cai in the team's report. The previous round of battery metal price increases has added to EV makers' profit pressures. The growing electrification of the global economy requires vast amounts of minerals, and the rapid electrification that kicked off around 2020 “overwhelmed the metals market,” Bhandari says. But now, supply is catching up and is cooling the market for metals like [nickel and lithium]( that are used in batteries, which can be one-third the cost of an EV. “The good news is battery prices are now falling rapidly,” Bhandari says. Goldman Sachs Research expects a nearly 40% decline in battery prices between 2023 and 2025, and for EVs to reach breakthrough levels in terms of cost parity (without subsidies) with internal combustion engine cars in some markets next year. Battery innovation is also helping reduce battery costs, and regulatory tailwinds continue to boost the EV sector. --------------------------------------------------------------- Can the Nikkei's record rally continue? After topping bubble-era highs, Japanese stocks are poised to rise even higher, [according to Goldman Sachs Research](. Japan's Nikkei 225 stock index closed above 40,000 on March 4, setting another record high after climbing last month above levels last seen decades ago. The broader Tokyo Stock Price Index, or TOPIX, has also rallied this year, approaching all-time highs. Two important structural changes are playing out in the Japanese stock market: The country is shifting to an inflationary economy after years of deflation, and corporate governance reforms are taking root, strategists Kazunori Tatebe and Bruce Kirk write in the team's report. Goldman Sachs Research analysts expect the TOPIX to reach 2,900 over the next 12 months (up from their previous 12-month forecast of 2,650). The outlook for Japanese corporate earnings is improving, Tatebe and Kirk write, after a positive surprise in third-quarter results and as Japanese companies benefit from a strong US economy and weak yen. Our strategists forecast cumulative growth in earnings per share of 32% over the next three years. “We see further earnings upside if improvement in the global manufacturing cycle continues,” Tatebe and Kirk write. --------------------------------------------------------------- The case for infrastructure as an asset class Teresa Mattamouros, a managing director in the infrastructure group in Goldman Sachs' Asset & Wealth Management, on Goldman Sachs Exchanges Driven by the need for more data centers, renewable energy sources, and new supply chains, the definition of infrastructure has evolved beyond just roads and bridges, says Teresa Mattamouros, from the infrastructure group in Goldman Sachs' Asset & Wealth Management division, on [Goldman Sachs Exchanges](. At the same time, legislation such as the Inflation Reduction Act and Repower EU are creating incentives to attract more capital into the space. While these incentives are helping to boost returns and attract investors, the macroeconomic backdrop is another key driver behind infrastructure's popularity. “Even though infrastructure, as an asset class, has not been in the headlines as much as other asset classes, such as private equity, the reality is that it has provided really stable and inflation-adjusted returns, especially in the past couple of years,” Mattamouros says. Returns on assets are often regulated or indexed to inflation, for example. In other cases, companies typically have dominant market positions in their sectors, which enables them to pass along cost increases to customers, she adds. Infrastructure assets also provide diversification benefits for portfolios, since the assets typically have a low correlation with other asset classes such as public equities. But uncertainty over global election outcomes, interest rates, and rising geopolitical tensions could temper investment, Mattamouros cautions. “When there's a lot of uncertainty, either from a geopolitical or regulatory perspective," she says, it's hard to decide to "invest a billion dollars on something if you don't feel very comfortable that the opportunity is not going to be at risk in the future." --------------------------------------------------------------- How retail CEOs are navigating a more complex environment The actions of retail companies this year will affect their fortunes more than the economy around them, says Tim Ingrassia, co-chair of Goldman Sachs Global Banking & Markets' Global Mergers & Acquisitions business, on [Goldman Sachs Exchanges](. “We're going from macro to what retail has always been, which is micro," he says. Ted Decker, the chair, CEO, and president of The Home Depot, says his company is investing in building more stores. “As much as we invest in our digital assets and, increasingly, delivery capabilities, our apps, [and] our outside field salesforces, the store remains the center of the ecosystem,” explains Decker, who participated in a panel hosted by the Retail Industry Leaders Association CEO Forum in late January. “We hadn't built stores in the longest time in our sector. And we're building stores again.” Tim Ingrassia, co-chair of Goldman Sachs Global Banking & Markets' Global Mergers & Acquisitions (L) and Vishaal Rana, a managing director in the cross markets consumer retail group in Goldman Sachs' Global Banking & Markets Retailers are also carefully monitoring the health of the consumer. “While there may not have been an economic recession, it does feel like, in talking to our guests, there's…maybe an emotional recession,” says Dave Kimbell, CEO of Ulta Beauty. “Our consumer is challenged. Even in beauty, where spending is healthy and the category is healthy, there are a lot of overarching concerns that are just dragging on the consumer.” Meanwhile, private equity firms are being selective about their investment opportunities and are opting for retailers with recurring revenues, primarily in the services sector, says Vishaal Rana, a managing director in Goldman Sachs' Cross Markets Consumer Retail Group in Global Banking & Markets. “I almost call it defensive growth retail,” Rana says. --------------------------------------------------------------- Briefings Brainteaser: Out sick Roughly 2% of US workdays are currently lost for health-related reasons, according to an analysis by Goldman Sachs Research. Chronic health conditions account for a substantial share of workplace absenteeism. Which of these chronic conditions was responsible for most working days lost among employed Americans in 2022? A) Arthritis B) Blood pressure elevations / hypertension C) Cancer D) Diabetes [Check the answer here](. --------------------------------------------------------------- Goldman Sachs in the news By clicking on these links, you will redirected to external websites that Goldman Sachs does not own or operate. Goldman Sachs is not responsible for the products, services, or content provided on those sites. Please refer to each external website's terms, privacy and security policies for details. [Forbes]( February 22 Greg Carey of Goldman Sachs on the influx of money into owning sports franchises (19:01) --------------------------------------------------------------- --------------------------------------------------------------- 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. 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