The market rally that began in March 2020 after reaching its lowest point in calendar year 2020 has more legs, believe analysts at Goldman Sachs, warning that there could be intermittent corrections along the way.
Markets, says Goldman Sachs, are in the first phase of a new investment cycle, which it calls the “hope” phase, after a deep recession. Investors, he says, begin to anticipate a recovery in this phase and it is usually the strongest part of the cycle.
“That is what we have been seeing this year. In our view, the main triggers for the rebound were a combination of slower infection rates and extraordinary political support. Financial conditions, which were tightening dramatically in the early part of the lockdown, quickly relaxed and governments implemented extraordinary fiscal support packages, ”wrote Peter Oppenheimer, global equity strategist and head of macroeconomic research at Goldman Sachs, based in London, in a September 7 report. .
Other than that, Oppenheimer believes that the economic recovery looks more durable as vaccines become more likely. “Our economists have recently made upward revisions to their economic forecasts and analyst expectations are likely to continue. Our bear market indicator (GSBLBR), which was at very high levels in 2019, points to relatively low risks of a bear market despite very high valuations, ”he said.
The 2020 bear market was strong and short-lived like other event-driven bear markets in the past. The declines, on average, were around 30 percent in most markets, but the speed of the crash and rally was even faster than normal. Since the low of March 2020, when most global markets bottomed out as economic activity came to a standstill following lockdowns to stem the spread of Covid-19, markets have recovered sharply.
The major global indices – NASDAQ, Bovespa, Seoul Composite, S&P 500, Dow Jones (DJIA), S&P BSE Sensex, NYSE, DAX, Nikkei and CAC 40 – have gained between 37% and 75% from their respective March markets. 2020 low, the data shows. Generally, a 20 percent or more increase in an index or a stock is considered to be the asset in a bull phase.
The liquidity support from global central banks that has driven this rally is likely to continue and “policy support” remains strong support for risk assets, Goldman Sachs believes. Given that the risk premium for stocks has room to fall, Oppenheimer says stocks as an asset class offer a reasonable hedge for higher inflation expectations.
“Stocks seem cheap relative to corporate debt, especially for companies with strong balance sheets (60% of US companies and 80% of European companies have dividend yields above the average yield of corporate bonds). The resumption of the zero nominal interest rate policy in the recent past, together with the broadened forward-looking orientation, has created an environment of higher negative real interest rates. This should be a great support for risk assets in an economic recovery, ”he said.
Finally, as the digital revolution continues to accelerate, Goldman Sachs believes that this transformation of the economy and equity markets has more room for maneuver. “These companies could continue to drive valuations and returns in this bull market,” the report suggests.
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