Just because Goldman’s track record at predicting the near-future is so fantastic (Abby Joseph Cohen “forecasting” in March 2008 the S&P would close the year at 1500, or about 40% off), the firm that spawned a thousand central bankers and ambassadors, has decided to try its hand at really long-term stock predictions. As in “three years over the horizon” long. And, of course, it’s only uphill from here.
To wit: “We develop a new framework for forecasting equity returns over the medium term using a consistent approach globally. We extend our forecast horizon to the end of 2015.”
Perhaps the framework consists of the following: If print (globally), then buy? Since the presence of a liquidity tsunami is the only variable that matters in a world whose fungible G-8 stock market has been reduced to a playground for central planners desperate to return confidence to a casino so rigged retail investors just can’t wait to leave regardless of the “promised” risk-free upside, and no longer even pretends to reflect reality, fundamentals, or discounting the future, the following sentence makes perfect sense:
We forecast strong returns, mainly driven by earnings growth, in all four regions we consider. We expect the best annualized total return in Asia ex-Japan (21%), followed by Europe (19%), Japan (15%), and finally the US (9%). These returns fall between the 50th and the 87th percentile of the distribution of US historical returns.”
And, of course, this:
With a 2015 horizon all regions look attractive on an absolute basis
Brilliant. And in 2008, when crude was at $140 and about to go to $30, Goldman recommended buying every barrel available.
For those eager and curious for more details about this Oracular profundity, we provide:
We expect strong equity returns globally over the next 3 years. In this report we develop our framework for forecasting equity returns over the medium term and extend our forecast horizon to the end of 2015. Our framework uses the medium term economic forecasts launched by our economists in their 2013 outlook pieces, and outlines a larger part of the path towards the strong 5-10 year equity return potential that we have highlighted in several past reports. We provide these forecasts for the four major regions that we cover and compare the return potential across these regions, which have so far had very different recoveries from the financial crisis. We forecast annualized returns ranging from 9% for the US to 21% for Asia ex-Japan. Exhibit 1 shows that this corresponds to returns between the 50th and the 87th percentile when adjusted for inflation and compared to the historical distribution of annualized 3 year real total US returns.
We see medium term return forecasts as particularly important in the current environment. Given the depth of the financial crisis, normalization will take a long time, and it is therefore important to map out the path towards recovery over the medium term. Also with bond yields at extreme levels, and the drawdown risk in equities still high, we see intermediate term equity forecasts as a good way to quantify the potential medium term costs of the near term safety of being in bonds rather than equities.
Our returns are mainly driven by earnings growth. The paths that we expect for prices and earnings are shown in Exhibits 2 and 3. We expect annualized earnings growth ranging from 8% in the US to 21% in Japan. The strong earnings growth outside the US reflects a rebound from cyclically weak margins. We forecast P/E multiples to fall 1% annualized in Japan and rise elsewhere between 1% in the US and 4% in Asia ex-Japan.
We model earnings growth and discount rates using historical relationships between these variables and the macroeconomic environment. We then feed these variables through our regional dividend discount models to generate our price targets in this central scenario. The targets are more model-driven than our usual 3, 6 and 12 months targets, as discretionary deviations from our models are more relevant over shorter horizons, where we have more visibility on specific risks and opportunities that are not fully captured by our framework.
The obligatory pretty charts and tables:
There is, of course, a caveat. Namely, “we may be wrong about everything if things don’t quite turn out as the central bankers want them to”
A disappointing economic recovery would be the main risk to our forecasts. Our forecasts are based on our economists’ forecasts of global growth accelerating from 3.0% in 2012 to 3.3% in 2013 and further to an above 4% pace from 2014 through 2016. Our alternative scenarios suggest that widely held concerns about margins and valuations not being truly cheap can be addressed without destroying the case for equities. However we judge markets to be roughly fairly priced for the current economic environment and therefore returns are unlikely to materialize on a sustained basis unless the economic recovery continues. Our discussion of risks focuses on the downside as the returns in our central scenario are already very attractive. However, there are clearly also upside risks, with a stronger economic recovery than we forecast being the most obvious.
Finally, like most of our readers, we wondered about one thing: why only 2015? Why not pull an IMF and predict where the S&P will be in 2022? Now that would be truly boss.