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Why Goldman Sachs believes bull run will continue

September 16, 2020 13:24 IST

Major global indices - the Nasdaq, Bovespa, Seoul Composite, S&P 500, Dow Jones, S&P BSE Sensex, NYSE, DAX, Nikkei and, CAC 40 - have all gained 37 per cent to 75 per cent since their respective March 2020 low.

The market rally, which started after the March 23 ebb, has still enough room to continue, say analysts at Goldman Sachs, who caution that there could be intermittent corrections along the way.

The markets, Goldman Sachs says, are in the first phase of a new investment cycle, which it calls a ‘hope’ phase, following a deep recession.

 

Investors, it says, start to anticipate a recovery in this phase and is typically the strongest part of the cycle.

“That is what we have been seeing this year.

"The main triggers for the rebound, in our view, were a combination of slowing infection rates and extraordinary policy support.

"Financial conditions, which were tightening sharply in the early part of the lockdown, eased rapidly and governments implemented extraordinary fiscal support packages,” wrote London-based Peter Oppenheimer, chief global equity strategist and head of macro research at Goldman Sachs, in a September 7 report.

That apart, Oppenheimer believes, the economic recovery looks more durable as vaccines become more likely.

“Our economists have recently made upward revisions to their economic forecasts and it is likely that analysts’ expectations will follow.

"Our Bear Market Indicator (GSBLBR), which was at very elevated levels in 2019, is pointing to relatively low risks of a bear market despite very high valuations,” he said.

The bear market of 2020 was sharp and short-lived like other event-driven bear markets in the past.

The falls, on average, were around 30 per cent in most markets, but the speed of collapse and rebound was even faster than normal.

Since March when most global markets hit bottom as economic activity came to a standstill, following lockdowns to arrest the spread of coronavirus, markets have rebounded sharply.

Major global indices - the Nasdaq, Bovespa, Seoul Composite, S&P 500, Dow Jones, S&P BSE Sensex, NYSE, DAX, Nikkei and, CAC 40 - have all gained 37 per cent to 75 per cent since their respective March 2020 low, the data show.

Typically, a rise of 20 per cent or more on an index or a stock is considered as the asset being in a bull phase.

The liquidity support from global central banks that has fueled this rally is likely to continue and the 'policy support' remains very supportive for risk assets, Goldman Sachs believes.

With the equity risk premium having room to fall, Oppenheimer says equities as an asset class offers a reasonable hedge to higher inflation expectations.

“Equities look cheap relative to corporate debt, particularly for strong balance-sheet companies (60 per cent of US companies and 80 per cent of European companies have dividend yields above the average corporate bond yield).

"The resumption of zero nominal interest rate policy in the recent past, together with the extended forward guidance, has created an environment of greater negative real interest rates.

"This should be highly supportive to risk assets in an economic recovery,” he said.

Lastly, as the digital revolution continues to gather pace, Goldman Sachs believes this transformation of the economy and stock markets has further headroom.

“These companies could continue to drive valuations and returns in this bull market,” the report suggests.

Photograph: Shailesh Andrade/Reuters

Puneet Wadhwa in New Delhi
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