Stocks Are the New Bonds: Goldman Sachs
Central bank quantitative easing programs have left little value in the credit markets, so Investors should be looking for returns in European equities rather than bonds, Peter Oppenheimer, chief global equity strategist at Goldman Sachs told CNBC.
The global economic crisis might have caused investors to park their money into perceived safe-haven assets such as German bunds and U.S. Treasurys with near-zero yields, but Oppenheimer said on Thursday that investors would see higher dividends in European equities. According to him, the STOXX Europe 600 could deliver annual returns of more than 7 percent - despite stagnation in the euro area
"So far, there has been a net absence of net flows going into the equity market, particularly in Europe,so equities have become almost an orphan asset class.But as more liquidity comes into the global economy through central bank actions and there is little value left in fixed-income markets, and even credit,equities will benefit by default," he said on CNBC's "Worldwide Exchange".
Goldman Sachs predicted that the current rally in European stock markets -- the German Dax is up almost 29 percent year-to-date, for instance --would continue next year.
"We think Europe will perform strongly because the valuations are still supportive and despite the stagnation in the economy in the euro zone, we do expect profits to grow through next year," he said, adding that the overall STOXX 600 had outperformed U.S. markets in 2012, despite poor earnings due to their attractive valuations.
"At the beginning of the year, the consensus was that profits would grow in Europe throughout 2012. We believed that they would fall and indeed…expectations have collapsed and profits have fallen."
But despite that equities have done well supported by very attractive valuations," he said. In terms of exposure, Goldman Sachs prefers companies with high-yield and strong balance sheet, Oppenheimer said.
"We also like the growth parts of the market because growth is also scarce," he added. "That leads us to things like luxury goods, to autos –which we think are undervalued – to insurance and media, as some of the sectors that we think will outperform through the course of next year."
Goldman Sachs is forecasting a moderate 3.3 percent increase in global growth in 2013, from 3 percent in 2012. The global recovery would have a knock-on effect on European businesses, Oppenheimer said.
"Next year, we do expect a recovery in the global economy…to which Europe's corporate sector is very well levered. It's that global recovery that allows margins to rise a little bit in the euro zone, gives some top-line growth and overall profit growth of around 9 percent."
Overall, Goldman's top pick for 2013 is the Japanese TOPIX index. The bank expects strong returns of 20 percent frontloaded towards the first half of the year,dependent on further easing by the Bank of Japan. "If that comes through, and there is more of an inflation target, then the equity market looks very cheap on an asset basis,"Oppenheimer said.
Goldman Sachs forecasts that Latin America will be "relatively weak" and will underperform in 2013. On the other hand, the U.S. will do quite well, because it's already more fully-valued than other equity markets, Goldman believes.