March 21 (Bloomberg) -- Stocks will probably begin a “steady upward trajectory” over the next few years because any declines in economic growth are already reflected in share prices, Goldman Sachs Group Inc. said.
“Given current valuations, we think it’s time to say a ‘long goodbye’ to bonds, and embrace the ‘long good buy’ for equities as we expect them to embark on an upward trend over the next few years,” Peter Oppenheimer, chief global equity strategist at Goldman Sachs in London, wrote in a report today.
The prospects for returns in equities versus bonds “are as good as they have been in a generation,” he wrote.
The Stoxx Europe 600 Index is trading at 11.2 times estimated earnings, compared with an average of 11.8 over the past five years, according to data compiled by Bloomberg. The index dropped 11 percent last year as policy makers tried to stop Greece’s sovereign-debt crisis from spreading. The MSCI World Index is trading at 13.2 times estimated earnings after falling 7.6 percent last year, data compiled by Bloomberg show.
“Periods of sustained falls in the market are typically better times to buy for the long run,” Oppenheimer wrote. “Partly, of course, this is also a function of valuations typically improving after a period of sustained losses in the market. Nonetheless, the key point is that in particularly bad economic periods, once the news is fully priced, investment outcomes tend to improve.”
The euro area’s economy will contract 0.1 percent this year, the European Central Bank’s projections show, down from its previous forecast for 0.3 percent growth. At least six of the 17 nations that use the euro are in recession. The ECB left its benchmark rate at 1 percent earlier this month. The central bank also said this month that inflation in the euro area will probably exceed the bank’s 2 percent limit this year.
In the U.S., the Federal Open Market Committee said this month that economic conditions would still warrant holding the benchmark interest rate near zero at least through late 2014.
Gains in bond yields can also support equities, according to Goldman. Ten-year yields have climbed from a record low of 1.67 percent set on Sept. 23, data compiled by Bloomberg show. U.S. 10-year yields were little changed at 2.37 percent at 9:30 a.m. in London, near their highest in almost five months.
“We would expect the early rises in bond yields to be positive for equity prices as they both become a reflection of rising growth and inflationary expectations, and could expect some equity re-rating in the initial stages of rising yields,” Oppenheimer wrote.
Equities offer an opportunity now, the strategist wrote, saying some risks to future growth are exaggerated, and emerging markets may offset fiscal policy tightening in some developed markets.
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