GS Chief Strategist Presentation in GS Conference in Munich

We visited Berenberg & Goldman Sachs German Corporate Conference in Munich on 23-25.9. One of the most interesting presentations was by Peter Oppenheimer, Chief Global Equity Strategist & Head of Macro Research EMEA, Goldman Sachs International.

The summary of his presentation is below:

• We are expecting everywhere inflation to reach central bank targets by mid-year 2025
• The rates will be going down as well, but not to the levels we have seen after the financial crises
• Governments are not interested in reducing debt – government debt will grow further both in EM and DM. So, longer-term rates will be a little bit higher.

• This will be a positive environment for equity markets in the US – the cycle is positive, but some structural parts are challenging.
  • Firstly, the current valuations are high compared to history, particularly in the US, where it has stood at the top of its valuation range over the last 20 years on PE basis.
  • The US market is worth 200% of the US GDP. That has not happened before.
  • The US is roughly 70% of overall global capital market capitalization. The rest of the world is only 30%.
  • Some of it is due to the technology companies in the US. The top five US companies represent 20% of global equity values.
  • Even without tech – the US is still expensive by historical standards
  • You have seen quite a lot of good news priced in terms of lower interest rates.
  • Secondly, the margins have peaked, and revenue growth will drive the valuations.
  • US markets might be rising, but slower than in the past months, as the growth will be driven by revenue growth. Revenue growth is linked to nominal GDP. So, the revenues and the valuations should grow in line with slower GDP growth.
• Outside the US, markets are cheaper, but that has been the case for a long time.
• We think there are selective opportunities to diversify
• There is a big market divergence from 2010 after the financial crises ended – the US grew much more strongly than other countries did
• It happened because the US managed to achieve much higher profit growth
• The success of US tech was due to the scalability of capital-light businesses. Now, they have already been transferred to capital-heavy companies. This year, they invested 90 billion USD.
• The question is whether they will be able to grow further even with capital-heavy balance sheets.
• Compared to the US market, Europe is at the lowest levels since the 90s at 35% discount on a PE basis.
• Part of it is due to the heavy weighting of the tech sector in the US. Even if you remove the tech sector, the discount is still historically the highest.
• European markets have performed well this year.
• Many of the European companies are benefiting from the global business they have.
• Dax index performed well and was able to disconnect from the slow German growth. German domestic business index was the only negative index in Europe.
• The lowest valuation in its history is now in the Chinese and German domestic markets.
• China is at the lowest historical PE levels. The Chinese market has been weak, and the Chinese administration has heavily disadvantaged its technological sector.
• Germany’s domestic-focused stocks are now at its historical lowest – there are some good opportunities in German mkt and Europe.

Recommendations:

• Firstly, in the US, we would look at midcaps; they react to lower rates, and the valuations are cheap. Macro is still supportive, US macro relatively healthy, healthy labour markets and decreasing rates – in this environment, the markets have consistently grown.
• Secondly, we would look at global nontech growth compounders – we have a collection of those.
• Thirdly – we diversify geographically; we like China; the valuation is very cheap, and there are some opportunities there.

Disclosure: 

The goal of the blog is to provide investment ideas for further research. I/we have a beneficial position in the shares discussed above either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. The article does not represent investment advice. Please do your own research before making any investment action.