Is it worth investing in stocks or is it time to go for bonds? Analysts Goldman sachs They have no doubts when betting on these assets, especially for the next twelve months.
The Equity Risk Premium (ERP) It consists of the higher 'extra' return required by investors to hold shares on government bonds, as the returns on equities are more volatile than those on debt.
A constant debate among fund managers, at a time when US equities have recovered most of the falls caused by the coronavirus pandemic, although the economy faces its biggest crisis since the Great Recession of the 1930s the last century.
"While stocks have never been so expensive since the tech bubble, based on a 24-month price / earnings ratio, the equity risk premium is near its all-time high, suggesting stocks have rarely been this attractive compared to bonds"Goldman Sachs analysts say in their latest report on this issue.
However, they add, although the ERP continues to be a good indicator of the future profitability of stocks relative to bonds, the decline in debt yields has raised the ERP structurally, which de somehow distorts its usefulness as a valuation instrument.
"The big drop in bond yields began in 2008 and the ERP has reached its highest for this reason," they argue. Almost 80% of the rise in the equity risk premium is due to this factor, they estimate.
Therefore, Goldman has revised its dividend discount model to reflect the lower trend of GDP growth and future profits, which reduces the implicit ERP of the market by two percentage points. In addition, they introduce other macroeconomic variables to calculate it, instead of market variables.
The new forecasts for lower profits and growth have reduced the European equities risk premium to 6.7% from 8.7% and the Risk premium for US equities to 4.6% from 6%.
Since 1990, Goldman estimates that European stocks they have offered a Extra annual yield on bonds of 2.5% in periods of 10 years, while the annual extra profitability of Wall Street in the same periods has been of 3.9%.
Their results suggest that "stocks are likely to outperform bonds over the next twelve months. From then on, although European stocks can continue to outperform bonds, our model implies that Equity overweight should be reduced on Wall Street".
In addition, they add that, "depending on the sensitivity of the fair value of the shares in relation to the ERP and the bond yields, the S&P 500 may rise another 10% until the end of 2021".
For Goldman, the economic recovery will continue in 2021, so your forecast anticipates a 60 basis point rise in bond yields over the next twelve months. "This rise should be positive for stocks," they conclude.
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