Goldman's global stock chief breaks down how the COVID-19 recovery is likely to be different to the cycle after the financial crisis
- Peter Oppenheimer compares the swift COVID-19 bear market recovery to the financial crisis.
- He says monetary support and fiscal expansion will likely to make this investment cycle different.
- A strong synchronized economic rebound with a more reflationary dynamic is more likely, he writes.
Last year was, by any measure, extraordinary. The collapse in economic activity around the world has resulted in some of the deepest recessions for decades - in the case of the UK, the deepest annual fall in GDP since the 18th century.But it was also unusual because the current economic slump was not triggered by economic factors, such as rising interest rates or collapsing asset prices, but by government policies to limit mobility in the face of the COVID pandemic.
While the speed of correction in equity prices was unusually rapid, the recovery from the bear market trough last March has been impressive: It far exceeded the typical path from a bear market trough and has followed a similar trajectory to the recovery from the low in 2009.The difference is that the falls in equity prices during the financial crisis were sharper, averaging around 60% (in line with the average of historical "structural" bear markets), compared with falls of around 30% this time (in line with the average for "event-driven" bear markets).
Why then, should the recovery in equity markets have been so swift? There are two important reasons.The first is that the drivers of this recession were not, like most recessions, a function of economic imbalances or rising interest rates, but instead a function of policies to curtail movement and activity; hence, the lifting of these restrictions should lead to a relatively rapid rebound, particularly given the high rate of household savings.The second is that there has been an unprecedented and coordinated global policy support effort. Having the toolkit of aggressive monetary easing in place from the experiences of the financial crisis a decade earlier allowed swift action to bring interest rates down to the zero bound and step up QE.
The absence of the "moral hazard" issues that plagued the financial crisis, together with much lower funding costs, made it easier for governments to get comfortable borrowing aggressively to support demand. The misplaced concern that a more aggressive response would trigger high inflation and fiscal crises has also dissipated.
The bold and determined policy response allowed investors to worry less about longer-term structural or systemic damage to the economies and companies than they did after the financial crisis.Following the financial crisis, structural problems of over-leverage led to waves of further problems, such as the European sovereign debt crisis and the impact of falling commodity prices on emerging economies.
Ample spare capacity also contributed to a decline in inflation. Corporate profit growth failed to recover strongly in many industries that were struggling to cope with lower prices and the impact of disruption. Technology was an exception but this was very heavily concentrated in the US, which in turn led to a widening gap of growth prospects and a stronger US dollar.
This cycle is likely to be different. The shift towards a combination of monetary support and fiscal expansion bolstered by unusually high household savings rates makes a very strong synchronized economic rebound with a more reflationary dynamic more likely.This should improve the prospects for cyclical companies and value-orientated strategies that were largely left behind in the past cycle, which was dominated by an ever-narrower group of technology companies.
Although the prospect of a strong cyclical global economic and profit recovery should be helpful for risky assets in the near-term future, we should expect lower returns over the medium-term compared with the past decade.The MSCI World reached a price-to-earnings ratio of around 10 in March 2009, whereas it has expanded to nearly 20 today. Bond yields were around 3% in the US and Germany in 2009, while they are now close to record lows (and remain negative in Germany).
This suggests that the next cycle will be less valuation-led than the last, as higher starting valuations and lower bond yields imply less room for valuation expansion.Higher government debt levels may also, in time, create more of a headwind for growth as interest rates eventually start to rise. The decade after the financial crisis was also dominated by three interlinked factors: the progress of technology, the outperformance of growth vs value, and the domination of the US.The convergence of risk premia across regions, together with less beta, should narrow the difference in index returns moving forward, making stock-picking, irrespective of location, more important.
As the impact of the digital revolution broadens out to impact more industries, and the de-carbonization revolution becomes a major driver of investment, we expect greater opportunities for differentiated returns within sectors as the differences between relative winners and losers across industries becomes more prominent.
Peter C. Oppenheimer is chief global equity strategist and head of macro research within global investment research at Goldman Sachs in Europe. He is the author of "The Long Good Buy; Analyzing Cycles in Markets."
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