The Sunday Times7 Sep 2020 20:32
Goldman analysts says bull market presages recovery and has long way to run
September 7 2020, The Times
Goldman Sachs believes that the stock markets’ post-lockdown rally still has plenty of legs despite last week’s wobble.
The big technology stocks that had been chased up to record highs over summer pulled back in the run-up to last weekend, taking the rest of the market with them. However, the US investment bank expects that markets will continue their post-lockdown ascent for a while yet.
“The strong rise in equities from the March trough makes a near-term setback likely. But we think there are ten strong reasons why this bull market should continue,” Peter Oppenheimer, chief global equity strategist at the bank, said.
First on Goldman’s list of bull signals is that equities are in the “hope” phase of a new stock market cycle which usually starts during a recession and is when investors begin to anticipate a recovery in depressed share prices. “[This] is typically the strongest part of the cycle [and it] is what we have been seeing this year,” Mr Oppenheimer noted.
The bank is also buying into optimism around a coronavirus vaccine, which would accelerate the global economic recovery. Goldman said that economists have already started to lift their forecasts which, in the past, has been “typically” followed by stock analysts nudging up their expectations. “Upward revisions could well drive equity markets higher,” Mr Oppenheimer added.
In addition, Goldman’s in-house bear market indicator has not flagged any worries about the markets’ trajectory despite the lofty valuations, particularly in the US, while the “aggressive monetary response” from central banks and governments is supportive for riskier assets such as stocks. Linked to that are ultra-low interest rates, which not only make it cheaper for companies to borrow money but also make stocks more attractive to investors looking for income.
Goldman argues that equities provide a “much more effective hedge” against inflation given that companies can pass on at least some of their increased costs to their customers.
Returns for bondholders, by contrast, are more set in stone and therefore more susceptible to a sudden jump in inflation.
The surge in share prices over spring and summer has left many wondering whether equity markets are now too expensive. Quite the opposite, says Goldman, which is adamant that stocks “look cheap” compared with corporate bonds. Companies’ dividend yields have remained “elevated” compared with bond yields, which have fallen as investors have poured into the relative safety of government and top-rate corporate debt.
The healthy dividend yields now on offer on the stock market, even among the technology giants and big European drugmakers, might start to tempt investors, starved of income from their bond holdings, back into equities.
“If dividend yields continue to fall as investors increasingly search for defensive and predictable yield, then these stocks c
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