The year 2019 had witnessed a sharp rise in equities on hopes of an economic rebound. The S&P500 rose 29 percent in 2019, the highest annual return since 2013, and Europe also posted its highest returns since 1999.

Share Market Live

NSE

Then, suddenly, the global economy came to a grinding halt. Economic projections and earnings expectations collapsed, and the markets experienced the fastest move into the bear market territory since 1929.

"This was an unusual recession not only because if its depth and global reach, but also because it was not triggered by economic or market factors themselves. In that sense, it bore many of the typical characteristics of an ‘event-driven’ bear market – a valuation adjustment reflecting the economic impact of an exogenous and unanticipated event," Goldman Sachs noted in a recent report.

The bear market of 2020 was sharp and short-lived like other event-driven bear markets in the past and the falls, on average, were around 30 percent in most markets, but the speed of collapse and rebound was even faster than normal, the report added.

So what now? Goldman Sachs sees 10 reasons to remain bullish on this market.

As per Goldman Sachs, many investors are perplexed by the fact that a number of markets are at new highs. However, the strong rise in equities from the March trough, coupled with bullish options positioning, makes a near-term setback likely, it added.

"This cycle is likely to see much lower returns than the previous one and we expect this cycle to be less of a ‘secular’ bull market driven by sustained valuation increases and/or very strong growth. But neither of these constraints is likely to be enough to derail the bull market from a structural perspective, or the likely outperformance of equities relative to bonds," the brokerage explained.

Here are the 10 reasons to remain positive:

1) We are in the first phase of a new investment cycle, following a deep recession. The ‘Hope’ phase – the first part of a new cycle, which usually begins in a recession as investors start to anticipate a recovery, is typically the strongest part of the cycle. That is what we have been seeing this year.

2) The economic recovery looks more durable as vaccines become more likely. A vaccine would accelerate the recovery starting in Q1 2021, particularly in the consumer areas that are highly sensitive to mobility.

3) Economists have recently made upward revisions to their economic

forecasts and it is likely that analysts’ expectations will follow. Upward revisions could well drive equity markets higher.

4) Bear Market Indicator (which was at very elevated levels in 2019)

is pointing to relatively low risks of a bear market despite very high valuations. While these high valuations, it could limit long-term returns for investors. It is more likely than not that this cycle is only in its early stages and has plenty of time to run. Currently, the indicator points to double-digit returns over the next 5 years.

5) Policy support remains very supportive for risk assets. There is both a central bank ‘put’ – a belief that central banks will be there to provide as much liquidity as is required – and a fiscal ‘put’ as governments have scaled up their willingness to support growth. Liquidity and systemic risks have been reduced and central banks are guiding to maintain zero interest rate policies for a substantial period. Meanwhile,

governments are prepared to borrow at ultra-low rates to support demand. Together these policies significantly reduce the left tail risk to equity holders.

6) The Equity Risk Premium has room to fall.

7) The resumption of zero nominal interest rate policy in the recent past, together with the extended forward guidance, has created an environment of greater negative real interest rates. This should be highly supportive to risk assets in an economic recovery. The prospects for economic recovery backed by an environment of negative real rates helps to push up equity valuations.

8) Equities offer a reasonable hedge to higher inflation expectations.

9) While equity dividend yields have remained elevated relative to government bonds, they have also not fallen as much as corporate bond yields. Equities look cheap relative to corporate debt, particularly for strong balance sheet companies. If dividend yields continue to fall as investors increasingly search for defensive and predictable yield, then these stocks could re-rate further, driving broader equity indices higher.

10) The digital revolution continues to gather pace. This transformation of the economy and stock markets has further to go. These companies could

continue to drive valuations and returns in this bull market. Tech companies generate a great deal of cash and have strong balance sheets, they are also seen as relatively defensive and might continue to outperform even in a market correction. Unless interest rates rise meaningfully, this sector of the market is likely to remain dominant for some time to come, and Goldman Sachs remain overweight in every region.

First Published:Sept 11, 2020 2:13 PM IST