over 3 years ago • 4 mins
Despite a torrid March, global stock market returns have overall been surprisingly solid this year – and a new report from investment bank Goldman Sachs sees plenty of potential for the party to continue in 2021.
As the world economy slowly recovers from coronavirus-induced shock and an expanding range of vaccines offers a glimmer of light at the end of the tunnel, Goldman’s outlined three main drivers for stock market gains in the coming months.
1️⃣ The inflation outlook
Investors currently expect inflation to remain subdued in 2021; something history suggests should be positive for stocks. The rate of price rises would have to tip 3% and keep climbing before stocks would take a serious hit, according to the bank’s analysis – as illustrated in this chart of annualized monthly after-inflation returns over the past 90 years.
2️⃣ Strong profit growth
Goldman forecasts that average profits at publicly traded companies around the world will grow 34% in 2021, rebounding from this year’s 20% tumble. Company profits are, of course, one of the most important influences on share prices.
Looking across different regions, the bank reckons that earnings will bounce back fastest in the US and Asia, with Europe bringing up the rear. While the former should return to pre-pandemic levels by the end of 2021, it might take a whole year longer for profits to recover in Europe – where markets are more reliant on sectors susceptible to coronavirus.
3️⃣ Stocks look cheap relative to bonds
While stocks certainly look historically expensive compared to companies’ revenues, profits, or asset values, they’re still cheap when compared to the bond market. As the chart below shows, the dividend yield for investors in S&P 500 stocks has held fairly steady over the past two decades, while the yield on 10-year US government bonds has tumbled. This means US stocks are currently their cheapest versus bonds since the 1950s – as shown by the climbing orange line.
Even if you disagree with Goldman’s reasoning, it’s worth understanding how these big banks position themselves. If an investor with billions of dollars at its disposal thinks things will move a certain way, you could do worse than simply follow suit. Equally, however, market-beating gains usually mean flying (successfully) in the face of investor consensus.
Digging into Goldman’s recommendations further reveals a focus on the classic “value vs growth” debate: whether the cheapest stocks or those with faster-growing income will outperform. Over the past few years, growth stocks have dominated – but the bank sees “some challenge” to this trend ahead. It points out that growth stocks have done better than value pretty much non-stop since the last financial crisis, and warns that this can’t continue forever.
Because of this potential for value to outperform growth in the short term, Goldman predicts that non-American markets – which have fewer growth stocks – will do better than the US over the next three months. Over a 12-month timescale, however, the bank has no geographical preference, instead forecasting “strong returns across all equity markets.”
Goldman’s report concludes by naming a few specific sectors it thinks will do well across various parts of the world. These include US value stocks, European renewable energy firms, as well as companies that’ll benefit if the Chinese yuan (CNY) weakens against the US dollar.
The long strings of letters shown below refer to “baskets” of stocks the bank has constructed; GSJPWJDL, for example, denotes Goldman’s Womenomics group of Japanese companies that score well for gender diversity. You may be able to dig up details of baskets’ individual components with a bit of determined googling…
Of course, 2020 has proved that predicting the future is hard. Almost no one foresaw the pandemic, so take all forecasts for 2021 with a pinch of salt. And, as an aside, BlackRock – the world’s largest money manager – made a conflicting call this week: it’s buying more US shares and selling those in Europe. BlackRock argues that America’s high proportion of tech firms will “enjoy long-term growth trends” while the eurozone’s many banks suffer extended profit hits from persistently low interest rates…
Do you agree with Goldman’s analysis or are you Team BlackRock – or do you take a different view entirely? Be sure to discuss this Insight with your fellow Finimizers in our Premium group chats.
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