Peter Oppenheimer, Goldman Sachs’ chief global equity strategist and head of Macro Research in Europe, talks about why the changing mix of policy support in this cycle suggests a possible inflection point towards a more reflationary environment.
This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
Welcome to our exchanges at Goldman Sachs Markets, update for Friday February nineteenth each week. We check him with a leader across the firm to get a could take on what they're watching in markets objects. You would go out of court communications. Here, the firm today we're gonna talk about the process. x for inflation and its impact on markets were joined by Peter Oppenheimer Chief, global equity, strategist and head of macro research in Europe, whose can Talking about his new research. Peter walked back to the problem. Thank you, Jake, be nice to see you, sir. In the latest research you put out. You say that we may be heading towards more reflation environment. That would seem really, since the financial crisis in two thousand nine. What's behind that thesis? Well, I think
The main thing to emphasise that were entering a period that is likely to be characterized by a combination of factors that we just simply haven't seen in what was a very deflationary led era post the financial crisis. So over the last decade or more now, inflation is tended to train downwards globally. So the bond yields which reached record low levels growth did recover the financial crisis, was not freeze incredulity slowly and it wasn't tickly strong, especially outside of you ass. You had the bank in crisis, the sovereign debt crisis, the class commodity market stable sensual to that decision three environment that we saw and soon to www tents, remembered to tighten fiscal policy and introduced austerity in many countries, particularly in Europe, bear in mind also the last decade, with very much dominated by the digitization of different industries
also lead to more distant inflationary pressure. So what's changed what we write in terms about forecast, we're gonna move into appeared a much stronger, synchronized global growth, Sal economies. Looking at six a M percent, real GDP growth this year over four and a half percent next year, and this is the strongest synchronize global growth that we would have seen over the last thirty years or so and bear in mind its also at a time when we have zero, policy by meeting upper continue until the second half of twenty four t. Even in the? U s that play negative real interest rates and we have loose? U S, financial conditions, always let loose monetary policy on top
say see more fiscal expansion were expecting to see a fiscal programme of one and a half trillion dollars approved in the. U S now will be another six point: eight percent of GDP. On top of the already nine hundred billion dollars I was approved for the end of last year. we also have very strong savings rates in household sectors across many of the major economies and on top of all that, as we move into a more de carbonate, Zation led world. There's like to be muffle capital investment in physical infrastructure. That is estimated to be in the region of sixteen trillion dollars over the next couple of decades? So when you take those things together, it's a sea, not nessus high inflation, but markets spending with less fears, deflation, a monk confidence in growth and inflationary expectations. So
implications, might the onset of inflation have, or at least the prospects for re inflation have on the bull market inequities over the next few months? but, in general, I think its positive bearing in mind. Deflation is very negative for real assets, linking this is very good for nominal risk, free assets like government bond, so the last day Paypal. So you seem very large amounts of money, moving into government bond markets and money market funds, and some of this I think it shipped back into equities, and we see some signs of that now. I mean in the last week alone now flows into global equity funds would a record sixty billion dollars scale that by assets the size, masses flows in the ninety six percent of history say: you're starting see, money coming interact is, I think, back to go further? Is people get more confident about rose and more confident that these
deflationary precious receding. Maybe inflation starts to pick up who said what we found from history and the many decades is actually the best return to that produce a when you at a point where Very low inflation bombed yields per they stopped to increase? again is reflected in stronger growth. Expectations we tend to get in. Recessions is invested, start price and recovery, but interest rates is still low enough to support risks. So I think in general, this transition into a more growth friendly so for noise and may be slightly more reflation backdrop will be positive for a Scots. It's like equities, Let's get a little deeper here in new research? You talk about six specific areas where outcomes could shift materially. If investors start pricing in higher inflation expectation, let's quickly talk to each of these. First of all, you touch on this, but equities relative to bonds.
Again equities would be better, as we see a strong rise in profitability. Now, of course, who see the big collapse in profits in the corporate sector over the last year were expecting globally profits to grow in the main, stop market by that thirty five percent and then double digit again and twenty twenty two and then but the resumption of dividend growth, I think, makes it more attractive relative to bombs the ticket in both the yields. Food loans and in many countries there bring negative views. So I think that's a supportive relative story for equities compared to fixed income They inhabit value stocks relative to grow stocks. One of the really interesting things about the post financial crisis era was how much the equity markets will bicycles it. You know the prospects there very much. According to the types of companies, the people were generally growth, foreign equities
seeking in sectors like technology did very well as their profits, returns on investment increased, but many other sectors, particularly the more mature industries, particularly low evaluation type of industries, did pretty bad enough. Some of that was also his these sorts of industries, very troubled by the effects of the financial crisis, in particular the bank sector. Which spent a long time rebuilding capital and struggling with this It's very low rates, the commodities industry as well, which is suffering from secular, falls in commodity prices. Now, as we do forwards in time as you get better growth prospects rise, in commodity prices. I think you'll start to find that value parts market pitcher, looking historically cheap on a relative, respected, start too and we ve seen some evidence of that in the last couple of months. Meeting has further to go
ok and about similar calls relative to defences. I can get the answer, but I love you. Eric ridden away It's a very similar arguments here, just as growth the technology is much better than that in areas of market like banks and commodities. So you also found a defensive industries. Things had very predictable, stable cash flows. Deferring those past the market which was cyclical, very economically sensitive because they were still concerns about economic weakness. Investors premium on those kinds of industries that could ride out any economic weakness with stable, cashflows now cyclical but tend to benefit. Of course, if you get a strong economic recovery because they have the most operational leverage, that means that there earnings war, rise proportion more than other the streets as growth Pixar. And
the classical sectors which are very sick people in the nature of things like basic resources, chemicals us choose oil, financials building the tools, the kinds of things that are very sensitive to the economic cycle and those I think game tend to look quite keep the moment more room for their profits to recover Hello based icing, though continue trout, form the new term. You mentioned financial, but more specifically, banks relative to stables. Thanks you during the last cycle were really the extreme end, the valiant trade, particularly in those markets, which remain daddy orientated. So you is a very good example of this as a stock market very much on the form. The? U s: that's because it had a high waiting in sectors that were very valid orientated and sure, as opposed to the. U s
which had very high waiting, an exposure to fast growing industries like technology, a ban also suffered because, as I mention they had a lot of problems to deal with in the aftermath of the financial crisis, they had to leave their capital. They had to deal with a squeeze the profit margins and this interest margins as interest rates collapse, they had to do with loan losses from the fool, so that crisis that over the last decade, or so they have He built balance sheets and needs very gauge any improvement in global drugs. interesting, the after many years of under the former politically very slight Europe in the most recent earning season were seen to be among the air is its marketing had the biggest positive surprise compared to it politicians say if you take Europe, for example,
in the latest round of earnings results we ve just been saying relative the consensus going in and the banks have beaten by about twenty seven percent. So almost eighty percent of banks and surprise that consensus by more than five percent so again it's a mature industry, is not a high growing industry to give very cheap and it stands to benefit. Lot from any rising interest rates and stronger synchronize growth? So again, That's it, the staple were defensive past markets. There is Finally, an opportunity to see the relative upside container again, habit volatility, how we think about high volatility relative to low volatility in this inflation environment, Well, it ain't. Low volatility was very much sought. After in the post financial crisis, Zira, there were lots of uncertainties, let alone such as economic uncertainties, falling interest rates
tendency to benefit not just for you long duration assets, in other words those who had their expected cash flows long into the future. the things that were very predictable, that had a low volatility and those sorts of assets tended to not just out form but go to hi evaluations, as we move into an invite. A greater confidence coming out of this deep recession we been, and people gets Less worried about future see more investment opportunities, then more prepared. It's a go into higher risk, even more volatile part of the market. I think so again. This is another example of wearing, might seem more rotation relative to the experience of the last few years. finally, the last topic you covered was dividends. How should we think that dividends in this new environment?
We dividends, I think, will improve alongside better profit gross. Now we have to gain political contacts. We just seem very big profits and in large. so many markets dividend have been costs as well, we go into this improved economic environment. Profit prospects, improve companies, bear to pay out more intensive dividend. Civil those different strange will become more dependable, and I think that would be pretty attractive as well now in the last decade or so dividend yields and remain pretty stable. Why won't you to fall very sharply? For example, Can you won't yields government bond yields, we're about? percent of the Eu S before the financial crisis of two thousand and eight and then down to levels, is around one essential so that whole period I'm dividend yields remained about saying that means investing demanded a high yield. High income when it is
compensates for that Eve risks, but his people get moving confident about growth and believed it actually interest rates. Might stop it now dividend. You can come down as dividend. Payment to increase, not me Is that really evaluations, equities cancer, try, so I think the prospects for dividends also improving from here that's another important reason why investors would be looking at actors as part of that. As the location indeed well Peter. Thank you much as very comprehensive looked at what we're facing, but thank you for joining us today pleasure. Thank you. That concludes this item. Sort of exchanges at Goldman Sachs. Thank you very much for listening and, if you and joy the show we hope you shouldn't scribe an apple pod cast and leave a rainy or a common, and
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Transcript generated on 2021-07-01.