Many companies, investors and economists alike will be wishing they had a crystal ball to see how the markets will continue to be affected by Covid-19. But with no such luxury and forecasting harder than ever, Goldman Sachs chief global equity strategist Peter Oppenheimer is the next best thing.
Dubbed ‘the godfather of stocks’, Oppenheimer, who has 35 years’ experience as a research analyst, believes we can learn a lot about the crisis and what it means for the markets by exploring the history of economic cycles. “To understand more about how the current market will recover we need to compare this year’s turmoil to past crashes.”
His latest book, The Long Good Buy; Analysing Cycles in Markets, although written before the crisis, helps us do just that. Oppenheimer, a member of South Hampstead Synagogue, explains: “Over many decades, despite significantly different economic, social and political conditions, economic and market cycles both seem to repeat themselves.
“Over the past three or four decades we have seen the Cold War end, the collapse of the Soviet Union, dramatic falls in inflation and interest rates, the shift from an analogue to digital world, and yet, through all those very different environments, consistent cycles and markets continue to occur.
Oppenheimer says the 30 or so major bear markets since 1880 can broadly be grouped into three types: cyclical, structural and event-driven.
“The ‘cyclical’ ones are the most common if you look back over a hundred years or more. They are typically a result of economic variables such as rising interest rates. Occasionally you get ‘structural’ downturns, triggered when financial bubbles burst and you tend to end up with things like a banking crisis, which exaggerate the economic downturn, such as the 2008 financial crisis. And then ‘event-driven’ cycles where everything appears to be going well but as a result of some kind of exogenous shock you get a destabilisation of the economic conditions causing a recession.”
Where does Covid fit in? In many ways it should be considered an event-driven one.
“Although there is nothing we can really compare to the scale of this economic shock, it did come out of nowhere, derailing the economy and causing a very rapid initial fall in asset prices and stock markets.
“This was the sharpest fall into bear market territory since 1929 and is almost certainly the deepest recession since World War II. But the easing of lockdown measures, coupled with massive policy support, suggest that this is also almost certainly the shortest recession since at least World War II.” Such a rally has left many scratching their heads. “The rapid rebound is common to what we have seen in these types of event-driven circumstances in the past. The difference this time is that so much of the world’s economy has been subject to a lockdown, virtually everything stopped. We have never seen anything that aggressive before. Consequently, the policy support we have seen from central banks and government has been much more aggressive than we have seen before, which helps explain how quickly equities rose and gives us some indications as to how things might move from here.”
So how does Oppenheimer, whose previous positions include managing director and chief investment strategist at HSBC, head of European strategy at James Capel and chief economic strategist at Hambros Bank, see things playing out?
“As lockdowns eased it was likely that we would see activity pick up again initially quite quickly, and we are beginning to see some evidence of that in the macro data. But that sharp sequential recovery from virtually no activity doesn’t really give us a realistic sense of the more medium-term growth rates that are likely to follow the initial bounce driven by economic activity emerging from lockdowns.
“While growth rates will look strong for a period of time as things recover from a weak base, most economies are not likely to get back to the sorts of levels of output that they were seeing at the beginning of this year until late next year or well into 2022.”
Prior to the crisis, there was a focus on ESG investing (environmental, social and governance) and Oppenheimer says this is likely to increase post-pandemic. “The crisis has given the government the excuse and ability to reinstate its ambitions to invest in areas like renewable technologies and environmental solutions across Europe and we think this is an interesting area. In addition to the environmental focus, the emphasis on corporate responsibilities towards stakeholders, including employees and suppliers is likely to grow.”
When it comes to investment opportunities, Oppenheimer urges prudence and taking a longer-term view. “There is a lot more debt that has been taken on by governments and companies so in general companies with very strong balance sheets, that are cash-generative, with high ESG standards – and particularly in industries that are not being heavily disrupted by technology – are pretty attractive. But because of the short-term uncertainty, investors have got to take a longer-term view.
“After the very strong financial returns we will see across most asset classes in the decade, we would expect to see much lower returns in the decade after this crisis. We need to be prudent and realistic about that.”
Outside work Oppenheimer is a trustee of The Anna Freud National Centre for Children and Families, a charity that provides training and support for child mental health services, and Mitzvah Day, as well as being involved in other charities.
Peter Oppenheimer is author of The Long Good Buy: Analysing Cycles in Markets