Goldman Sachs

Booms, Bubbles and Bears

Andrewe Wilson by Frank Beer for Handelsblatt
Andrew Wilson said the situation isn't as bad as many investors fear.
  • Why it matters

    Why it matters

    Andrew Wilson suggests buying opportunities may be at hand as investors have been too aggressive about selling off stocks since the start of the year.

  • Facts

    Facts

    • After a strong finish of 2015, the German DAX index has dropped more than 20 percent over the first five weeks of the year, upsetting private and institutional investors.
    • Mr. Wilson predicts ongoing volatility for 2016 and 2017, but a generally positive trend.
    • The Goldman Sachs asset manager considers it possible that the ECB will further lower its interest rates.
  • Audio

    Audio

  • Pdf

Andrew Wilson, the head of Goldman Sachs Asset Management in Europe and global head of fixed income, remains among the optimists in today’s uncertain market world. He argues investors are more worried than the global economic situation warrants.

Mr. Wilson called the recent stock-market sell-offs around the world “exaggerated.” Perhaps most importantly, he rejected the notion that global stocks have entered “bear-market” territory. With prices falling, he suggested the time to buy again may soon be at hand.

Germany’s blue-chip DAX stock index on Monday fell below 9,000 points, the lowest level since 2014, due to slower growth from China, continuing worries about the global economy and the low price of oil for the foreseeable future.

Mr. Wilson is chief executive of Goldman Sachs Asset Management International, with responsibility for Europe, the Middle East and Africa. He is also responsible for the asset manager’s fixed-income business. He came to Goldman in 1995 after stints with the Bank of England, the Reserve Bank of New Zealand and Rothschild Asset Management.

Goldman’s asset-management business has been running since 1989 and is one of the world’s largest fund managers. It had $1.028 trillion (€920 billion) in assets under management at the end of 2015.

Mr. Wilson based in London but spoke to Handelsblatt in Düsseldorf after meetings in several cities across Germany.

 

Handelsblatt: Over the last few days you have met a number of German investors. How is their mood?

Andrew Wilson: After the turbulent start to the year the level of uncertainty and lack of information are high. Investors naturally want to hear our forecasts, to hear what returns are still on the cards and what risks and opportunities we can see.

First and foremost, the large share indices have plummeted. Is the boom over and is this being succeeded by a bear market?

I don’t think that this is the beginning of a bear market. That said, the mood is very negative. And we have experienced an unusually long period of increasing share prices.

It has been over seven years…

There are three main factors that currently worry the markets. And market commentators tend to treat these three as one big issue. They come to the conclusion that global economic growth is dramatically slowing down as a result of China’s weakness. That is why the oil price is falling. That is why the share markets are crashing.

And is that wrong?

I think in reality we are seeing three separate events. Of course the oil market is important. The fact that the oil price is sinking is a significant development. But we see this as the result of increased supply, from Iraq for example, and not as a sign of slow-down in global growth. In the past year demand has even gone up and not declined. It is the amount of supply that is keeping the oil price this low.

So if the oil price is no indicator of an imminent recession, what about China?

There is no question that growth in China is slowing down. Of course, one could assess this as being very negative. But we see more of a transition in the Chinese economy. The traditional growth sectors such as energy or cement production are becoming weaker, which is also a result of lower investment. However, the consumer sector is growing. And the services sector now accounts for half of China’s gross domestic product. Of course China is growing more slowly than previously, but the situation in our view is by no means as bleak as many believe.

And the third main factor alongside oil and China are the central banks?

The big question is: how many interest rate increases is the Fed going to approve.

What do you expect?

At the beginning of the year we were expecting another three interest rate movements in 2016. But the parameters have changed, not least through the sell-off on the markets and the development of the U.S. dollar. If we remain at this level on the capital markets, there probably won’t be three interest rate movements but more likely only one or two. In any case, we expect the situation on the markets to calm down and the extreme fluctuations to become less. We also expect credit spreads to normalize. We would also not yet rule out the possibility of the Fed approving a further three interest rate increases in the course of the year.

So no specific forecast?

In recent weeks we have seen, after all, just how quickly circumstances on the capital markets can change. But: three, but possibly only two interest rate movements by the Fed.

You are ruling out the possibility of the Fed completely passing up any further interest rate increases?

For that to happen there would have to be a much greater sell-off on the stock markets and also on the bond markets. We are not seeing that.

 

New York trader holding a clipboard AP
A bad day for trading in New York, on Monday, February 8. Source: AP

 

Was the current sell-off perhaps even exaggerated?

I think that the sell-off was indeed a little exaggerated.

But just a little?

It depends where the oil price stabilizes. If the oil price stops at about $30, that will of course have significant effects on the oil industry. But we are expecting a rise to between $35 and $40. But recent weeks have shown how difficult it is to continue to make any predictions whatsoever – the fluctuations on the markets are simply too great. Yet for as long as there are regions of the Middle East that are dependent on oil production, supply will remain high. For that reason, we cannot rule out seeing even lower oil prices. However, demand remains high.

So you don’t expect a much weaker economic growth, including a reduced demand for oil?

We don’t see the low oil price as a barometer for weaker global economic growth. Rather, we see it as a sign of the extremely high level of supply in this sector. Of course, the oil price is normally regarded as an indicator of global economic growth, but that rule does not apply this time.

What role do the central banks play? Could they yet solve the problems?

The lower the interest rates, the easier it obviously is for countries to service their enormous state debts. But interest rates cannot stay this low forever.

Why not?

Low interest rates are a sign of an ailing economy, an economy that is weak. Growth is promoted in order to increase the rate of inflation. Incidentally, it is interesting that both the ECB and the Bank of Japan have set the inflation target at almost 2 percent. But at the moment we are not seeing any real progress towards achieving this goal.

What is the reason for that?

With their low interest rates the central banks are not generating sufficient growth to achieve such a rate of inflation. In an environment with such low interest rates, low growth and low inflation are virtually symptomatic. The central banks are faced with this problem. Low interest rates may be the right policy for a short while but not in the long term. We need more growth, otherwise they won’t go up again. Low interest rates reflect the weak growth environment, growth causes interest rates to rise. We need sustainable growth. But we haven’t yet got to that point in the major economies.

What does that mean for the markets? Are we experiencing a credit bubble?

We have plenty of debt, that’s true. But it is too early to speculate about a bubble.

Will the ECB pump more money into the loan markets and extend its purchasing program with further quantitative easing?

We expect the ECB will stick to its present course. It is perfectly possible that it will lower interest rates again in the course of the year. We don’t expect to see much inflation. The pressure towards extending the QE program is relatively high. It remains to be seen whether the ECB then increases the monthly figure, i.e. buys more debt every month, or extends the existing program in order to strengthen the economy. There is a considerable hurdle to take in that case, though.

Will the ECB also buy other classes of investment?

Buying corporate bonds or even shares would be another obstacle, and a very great one at that. That would present the ECB with a kind of moral dilemma. Which shares or companies should it buy? From which country? The hurdle really is enormous. But we would not rule out such purchases, were the situation to deteriorate further. But we are still a long way away from that. And the markets have already priced in plenty of bad news.

Does that mean that you see buying opportunities?

It’s beginning to get interesting. We used to be rather conservative when it came to asset classes such as high yield, for example. That is slowly changing.

Which countries and industries are you contemplating?

The United States is still the largest market for bonds with lower credit ratings. European high yields are also no longer quite as cheap as American ones. There are different reasons for this, for example that the European high yields are better quality, the energy market is not so heavily weighted. In addition, the ECB’s bond purchasing program underpins this, of course. While central bankers aren’t buying corporate bonds, other investors are selling government bonds, and investing the money released into high yields.

And what are the prospects for shares?

If you look at the valuations, they have of course improved in value in recent weeks. But you can’t say that they are now better value than ever before. But these are relatively fair valuations. The price-to-earnings ratio for American shares is 17 or 18. That is fair but not cheap. European shares are valued at just 14 to 15 times their earnings. But that is still a bit higher than at the beginning of the QE program or at the time of Mario Draghi’s “whatever it takes.”

What is your forecast for the share markets in 2016?

Anyone getting in at today’s level should achieve a positive yield.

Even with shares from emerging markets?

We have experienced intensive sales there, too. And it is surprising how closely virtually all investment categories currently correlate to the oil price. Whenever it dips, most investment categories also lose value. But we expect this correlation to end. Lower energy prices are of course bad for energy companies and for oil-exporting countries…

…but good for those who import oil.

That’s right. Low oil prices are good for oil importers and good for consumers. Currently, most investors seem to overlook the fact that the low oil prices are great for European and also for American consumers. And they are also good for some of the emerging markets – just consider India or South Korea. Oil importers are profiting enormously. It’s understandable that oil exporters such as Brazil, Mexico or Russia have come under pressure. But it is less understandable why oil importers are falling as well.

So the sell-off was exaggerated here, too?

Investors wanted to reduce their risk and simply sold everything. This affected the emerging markets in particular. It’s now about identifying the winners and losers from the low oil price and taking a closer look at the ratings. We don’t have positive expectations towards all of the emerging markets, but there are some opportunities there. This is because in the sell-off the markets made no distinction between oil importers and oil exporters.

Let’s take a look at the next few weeks or months. Will Mr. Draghi and Ms. Yellen be able to calm the markets?

Ever since the onset of the financial crisis, we have relied on the central banks. Mario Draghi recently showed once again just how important and powerful the central banks are when it comes to calming the markets. At least for a few days. But nervousness is high, investors weigh every word carefully and look to overseas markets. The markets don’t really expect that there will be a further interest rate increase in the United States in March. That will help to settle nerves. But at some point we need to get back to a situation in which we are no longer reliant on central banks.

But that will take some time?

I don’t think that it will take as long as many think. We just need a certain stability. A glance at the statistics shows us that the first two weeks of the year represented the worst ever start to a year for the share markets. The markets are extremely volatile – at the moment it is difficult to imagine a less volatile market.

Perhaps this heightened volatility is the new normality?

The markets will certainly remain very volatile in 2016 and probably also into 2017. But the fluctuations will become much less than at the beginning of the year. But it could be a couple more months before volatility starts to go down. It is not inconceivable that at some point during the second quarter, if the U.S. economy is growing, the markets have calmed down, and the advantages of the low oil price for consumers become clearer, the world will look different again.

 

Jessica Schwarzer is an editor at Handelsblatt’s finance desk in Frankfurt and leads markets coverage. To contact the author: schwarzer@handelsblatt.com

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