The head of Goldman Sachs’ equities division says the market is not properly estimating the potential of the economic recovery this year, and that value stocks and cheaper cyclicals will be the biggest winners in this upturn.
“The underlying trend is pretty clear: we are entering a period of very synchronized global growth,” Goldman’s Peter Oppenheimer said in an interview with Bloomberg TV, adding that he expects global growth of 6.5 percent this year due to supportive monetary and fiscal policies, as well as rising commodity prices. “Those conditions are still very favorable for cyclical and value stocks.” For the expert, there is still room for gains.
The past few sessions have been loss-making for global equity indices, with investors shedding the most expensive listings, such as technology stocks, due to concerns about rising interest rates on sovereign bonds. However, the pullback in risky assets did not last long, and investors began to buy the cheaper bonds. The focus this week migrated to optimism about the rapid vaccination and plans to reopen the economy.
The performance of cheaper, or value, stocks outperformed companies with strong growth in February. The MSCI World Value index rose 4.5 percent in contrast to gains of just 0.3 percent for the MSCI World Growth gauge. Goldman’s Oppenheimer said there is bullish potential for bets on reopening, such as in travel and leisure, beverages, banking, commodity sectors and transportation infrastructure.
“These are sectors that still look cheap and could benefit greatly from the kind of strong growth recovery we expect from mid-year, driven by faster vaccine deployment, especially in the UK and US,” he said. High levels of savings should translate into strong consumption growth as restrictions are eased, he added.
At the same time, Goldman still likes some technology companies, but notes that there is less room for improvement in estimates as these pandemic winners are more vulnerable in terms of valuation, higher bond yields or steeper yield curve, Oppenheimer said.
On the selling wave in the debt market, Oppenheimer said equity investors will now watch the speed, level and reason behind the rise in yields. A 40 basis point increase in yields on 10-year U.S. Treasury bonds in a month could lead to negative equity market returns, he said. But usually rising rates and inflation expectations are positive for stocks because they reduce the implied risk of recession and deflation, Oppenheimer said.
“If it’s a gradual move, I think stocks can perform very well in terms of value and cyclicals as well. If it’s a very rapid move, we’ll start to have problems,” Oppenheimer said. “But if it’s an increase in nominal interest rates and breakeven points reflecting stronger confidence in growth and inflation, that’s much more positive.”
