PUBLISHED SUN, MAR 6 20226:44 PM EST CNBC
A trader works at the Goldman Sachs stall on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters
LONDON — Risk indicators suggest that the stock market could be due for a rebound, according to Goldman Sachs Chief Global Equity Strategist Peter Oppenheimer.
Global markets have been rattled over the past week by Russia’s invasion of Ukraine and subsequent crippling sanctions from Western powers. Losses continued to deepen on Friday as Russian troops seized Europe’s largest power plant.
Oppenheimer said equity risk premiums — the extra returns an investor can expect for taking on more risk — were “starting to get quite large,” but had not yet reached the levels seen during major systemic crises such as the Global Financial Crisis of 2008.
Speaking to CNBC’s “Squawk Box Europe” on Friday morning, he added that Goldman’s Risk Appetite Indicator, which looks at different risk premia, indicated that on the basis of trends seen from similar levels in the past, “the market … is getting a bit oversold.”
Goldman Sachs: A lot of bad news is priced in and there’s room for medium-term returns
In a note last week, Goldman Sachs showed that the average rise in markets from this level is around 11% over 12 months, close to the Wall Street giant’s current forecast for returns over the next year.
Growth slowdown
Some of the recent bearishness in markets has been attributed to concerns about a growth slowdown just as central banks begin tightening monetary policy and raising interest rates from their historic pandemic-era lows.
Oppenheimer said the impact of the geopolitical uncertainty on markets related “very much” to the surge in energy prices, especially when there was already a lot of inflation pressure which had shifted central bank guidance “quite radically” toward higher rates in recent months.
“That — and therefore the implication it has on financial conditions, on growth — is really what’s being reflected in the markets from here. And in terms of uncertainty and the risk premia, of course, it could go somewhat further,” he added.
‘Reasonable returns’
However, Oppenheimer noted that private sector balance sheets, by and large, remain quite strong across households, banks and corporates, which should “soften the negative shock” from higher rates and uncertainty in the real economy.
He added that in Europe, fiscal policy was likely to continue expanding and there is less urgency to tighten monetary policy, compared to in the U.S., as labor prices on the continent are not rising as quickly.
“While there is going to be a growth hit and an earnings hit, given where prices are and valuations are, over a medium term I think there is room for reasonable returns,” he said.
Oppenheimer suggested that while it is too early to take a view on whether to buy the dip on Russian-exposed European stocks, which have taken a pounding over the past week, there were investment opportunities out there.
Goldman Sachs: Risk appetite indicators suggest market is ‘a bit oversold’
“One of the clear implications here is that there will be more spending on infrastructure. We’ve already heard the desire of the Germans to increase their military budget and re-accelerate their focus on decarbonization and finding alternative energy sources, so that would be an area that we would be most focused on as an opportunity,” he concluded.
Germany last week announced a surprise expansion of its defense budget, which sent shares of companies like Rheinmetall, BAE Systems and Thales surging. Europe’s largest economy has also ramped up its focus on alternative energy sources, as the continent looks to extract itself from reliance on Russian resources.
‘A lot of the bad news is priced in’ Oppenheimer expects corporate earnings expectations to take a hit, partly as a result of higher energy prices and the significant effects of the conflict in Ukraine on commodities.
“About a 1% slowdown in sales-weighted GDP — so the GDP of the revenues of European companies across the world — would reduce EPS [earnings per share] by about 12%,” he projected.
“Given that we were looking at around 8% growth to start with, you could easily get, of course, to a point where earnings are flat or even contracting. It wouldn’t be that difficult to do.”
However, Oppenheimer contended that the market is pricing economic growth relatively conservatively.
“It would look as if markets are now pricing pretty much flat growth over the course of the next 12 months, so a lot of bad news is priced in,” he added.