Goldman: Equities Cheapest vs. Bonds in a Generation

In a new report, Goldman Sachs says that stocks are as attractive compared to bonds as they’ve been at any time in the last generation, and that investors would be wise to shun bonds and focus on equities.

“Given current valuations, we think it’s time to say a ‘long good bye’ to bonds, and embrace the ’long good buy’ for equities as we expect them to embark on an upward trend over the next few years,” says the report, written by Peter Oppenheimer and Matthieu Walterspiler. (Thanks to Zero Hedge for highlighting the report). They argue that several factors — including high starting valuations, the downgrading of growth expectations following the credit crisis and Great Recession, and the “rise in the cult of fixed income in the aftermath of the Asian crisis as EM countries with surplus savings bought into US treasuries and other bond markets” — have all led to a “re-rating” of stocks over the past decade. And that has made them very cheap compared to bonds, according to Goldman.

Goldman offers several reasons that the firm is more optimistic on equities than many are. Among them:
  • The weak growth experiences being felt in many economies in the developed world are not universal and, by and large, are not being felt in many of the large emerging economies;
  • Valuation of risky assets into this period of sub-par growth is significantly lower than it was going into other weak periods of activity such as the 1970s, or Japan in the 1990s;
  • Goldman’s global projections show that the next decade is likely to be a peak period for global growth

As for concerns like a lack of policy options, the impact of de-leveraging on future growth, and the collapse in investment spending and demographics, Goldman says, “While many fear that these, and other factors, will push down on the current high level of ROEs and margins, we think these risks are overstated. While margins may struggle to rise much from current levels, other factors (technology and compensation control) are likely to prevent margins falling, at least as much as current valuations imply.”