The US banking and investment group reckons that there is plenty of life yet in the US equity market, and others besides, even after more than a decade of a rally in stocks. Valuations are expensive in certain areas, but history teaches that the price of buying earnings is not always a worrying sign.
The bull market in global equities, which has gone on for more than a decade and the US economy – often the motor for the rest of the world – hasn’t run out of momentum, and is unlikely to do so soon, predicts Goldman Sachs in its 2020 outlook,.
The US firm’s investment strategy group said that although risks of recession have increased since it set out forecasts a year earlier, they haven’t yet reached the point at which a negative bet on equities is justified. The valuation of equities is also not yet a credible reason for going underweight equities. (The price-earnings ratio of the S&P 500 Index of US stocks is about 24 times earnings, still some way below the level of about 38 at the time of the dotcom bubble's zenith.)
“Of course, we remain vigilant. Bouts of volatility are inevitable, especially in a presidential election year, and investor sentiment can shift quickly in response to geopolitical headlines or negative economic surprises. While we remain mindful about the broad range of risks that could undermine this recovery and bull market, our recommendation to stay invested remains intact,” the Wall Street firm said.
“Since November 2013, when equities first crossed the ninth decile of valuations (defined as a level at which equities have been cheaper at least 80 per cent of the time), we have recommended 58 times that clients stay invested, asserting that higher valuations alone were not a signal to underweight equities,” it continued.
In fact, Goldman Sachs said that it has cut its assessment of a recession to a probability of 20 to 25 per cent.
As far as US equities are concerned, Goldman Sachs has a base case for a total return in 2020 of 6 per cent; on a “good” case, a return of 12 per cent. “We expect slightly better earnings growth than last year, driven by modestly higher global growth and a lesser drag from escalating trade wars, supported by robust corporate [share] buybacks,” the firm said. It added that it predicts slightly higher returns for Europe, Australasia and the Far East and emerging market equities. Europe, Australasia and the Far East equities are, as a whole, significantly cheaper than US equities, at a discount of around 42 per cent, compared with an historical average discount of 25 per cent.
Goldmans said that during 2019, as equities rallied, it cut some of its risk levels.
On fixed income, the US firm said it continued to recommend being underweight, aka negative, of US debt. Goldman Sachs said it does not expect the US Federal Reserve to change its key fed funds rate – the main tool for setting monetary policy – this year.
Among other asset allocation positions, Goldman Sachs said that it is overweight eurozone banks, a position it has started to take since June 2018; it predicts that such banks, which are enjoying improving credit quality, will post double-digit returns for holders of their equity in 2020. Another asset allocation tilt is towards South Korean equities, driven by prospects of robust earnings growth when compared with those in similar countries.
One general takeaway from Goldman Sachs’ outlook – which runs to 104 pages of densely-argued analysis and statistics – is that clients should “stay invested” in markets rather than hunker down in cash or other substitutes.