Investing in 2020 & Beyond: Global Strategy Paper

PORTFOLIO STRATEGY RESEARCH | April 28, 2020 | 5:05AM BST
GLOBAL STRATEGY PAPER NO. 37

Investing in 2020 & Beyond
7 Themes & 3 Styles
Peter Oppenheimer
+44 20 7552-5782
peter.oppenheimer@gs.com
Goldman Sachs International
GROWTH VALUE DEBT Sharon Bell, CFA

+44 20 7552-1341
CONSOLIDATION QUALITY sharon.bell@gs.com
SMALL CAPS MARGINS TECH ESG
INCOME INFLATION FINANCIALS Guillaume Jaisson
CYCLICALS DEFLATION +44 20 7552-3000
guillaume.jaisson@gs.com
Lilia Peytavin
+44 20 7774-8340
The next cycle, whether it becomes a strong bull market or not, is less likely to be lilia.peytavin@gs.com
driven by valuation expansion as interest rates are at their lower bound. But some Goldman Sachs International
key drivers are likely to shape the difference between relative leaders and laggards:
• High debt levels, and low nominal growth.

• Low levels of inflation (at least in the near term).
• Continued digital revolution.
• More diversification of supply chains.
• Downward pressure on margins.
• Greater consolidation.
• Greater focus on the 'social contract' and ESG.
To this end, there are likely to be three investment conclusions:
• Growth will remain scarce: growth companies will continue to prosper.

• Income will remain scarce: sustainable dividend payers will prosper.
• Debt levels will be higher: strong balance sheet companies will prosper
In the US, tech is still likely to remain the long-term winner. In Europe it’s more likely to be a
combination of structurally strong and/or stable sectors: Healthcare, Consumer staples and
Tech. The largest stocks in these spaces we’ve dubbed the ‘GRANOLAS’: Glaxosmithkline,
Roche, ASML, Nestle, Novartis, Novo Nordisk, L'Oreal, LVMH, Astrazeneca, SAP, Sanofi.
They might not ALL do well but they generally have some growth and/or stability in
earnings and DYs in the 2-2.5% range (attractive vs. other asset classes).
Investors should consider this report as only a single factor in making their investment decision. For
Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to
www.gs.com/research/hedge.html.
The Goldman Sachs Group, Inc.

Goldman Sachs Global Strategy Paper
Has a new bull market started?
The longest equity bull market in history (at least for the US) came to an end on
February 19, just a few weeks short of its 11th birthday.
Exhibit 1: Has a new bull market started?

S&P 500
25 months 19 months 8.0 years 4.7 years 4.1 years 8.4 years 4.1 years 25 months 23 months 5.1 years 31months 7.8 years 5.0 years 10.9 years
(+65%, 27% (+40%, 24% (+369%, (+308%, (+150%, (+254%, (+86%, 16% (+48%, (+73%, (+220%, (+65%, (+302%, (+101%, (+401%,
pa) pa) 21% pa) 35% pa) 25% pa) 16% pa) pa) 20% pa) 32% pa) 25% pa) 21% pa) 20% pa) 15% pa) 16% pa)
3.6 years
(+80%, 32 months 18 months
31 months
2.9 years 18% pa) (+62%, (+60%,
22 months (+74%, 23%
(+60%, 19% pa) 35% pa)
(+39%, 19% pa)
17% pa)
pa)
17 months 1 month
21 months 6 months 1 month (-19%, 2 months
13 months 17 months (-19%,
13 months (-27%, (-28%, (-32%, -82% pa) (-16%,
(-33%, (-36%, -14% pa)
(-38%, -16% pa) -46% pa) -90% pa) -63% pa)
-31% pa) -26% pa)
-33% pa)
5.1 years
(-58%, 14 month 7 months
13 months 5 years 25 months (-22%, (-22%, 2 months 30 months 17 months
-15% pa) 20 months 20 months
(-29%, (-29% (-32%, --18% pa) -32% pa) (-20%, (-49%, (-57%,
(-48%, (-27%,
-27% pa) -7% pa) -17% pa) 33 months -32% pa) -17% pa) -61% pa) -23% pa) -45% pa)
(-85%,
-50% pa)
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020
Source: GFD, Datastream, Goldman Sachs Global Investment Research
Whether we are in a new bull market or not is as yet unclear. But if this is the case, it
would have been a short and mild downturn, particularly relative to the severity of the
economic collapse. So far, a relatively small proportion of the previous bull market has
been unwound; 42% in this cycle compared with an average of 68% in previous cycles.
Exhibit 2: Proportion of the bull market return lost in the subsequent bear market
Last bear market from 19/02/20 to 23/03/20.Computed as 100% - return at the end of the bear market since the
previous trough / return of the bull market
200%
% of Bull market return lost
Median
150%
100%
68%
50%
110%
100%
113%
114%
113%
203%
125%
119%
107%
111%
64%
39%
46%
60%
48%
49%
89%
61%
54%
73%
79%
30%
50%
49%
51%
61%
42%
0%
1852-57
1864-65
1887-93
1906-07
1919-21
1937-42
1961-62
1968-70
1987-87
2007-09
1847-48
1858-59
1860-61
1873-77
1881-85
1902-03
1909-14
1916-17
1929-32
1946-48
1956-57
1966-66
1973-74
1980-82
1990-90
2000-02
2020
Bear Market
28 April 2020 2
And it would have been one of the shortest bear markets in history.
Exhibit 3: The current recovery has been the sharpest among historical bear markets
MSCI World recoveries out of bear markets since 1970
155 10th/90th Percentile

Average
Current
145
135
125
115
105
-9m -6m -3m +3m +6m +9m

95
1 year before Equity Bear Market End 1 year after
Source: Datastream, Goldman Sachs Global Investment Research
The rally has come just as earnings estimates have fallen so the rise in valuations has
been especially marked (Exhibit 4). And the change in P/E valuations has moved well
ahead of our measures of growth momentum, also pointing to quite a sharp ‘V’-shaped
recovery.
Exhibit 4: Valuations have risen sharply as prices have bounced Exhibit 5: Valuations are consistent with an increase in Global
just as EPS estimates are falling growth
Current Activity Indicator (CAI)
22 50 8
12m fwd PE yoy change in Global 12m fwd P/E (%)
20 S&P 500 40 yoy change in Global CAI (RHS, pp.) 6
19.2x 30
18 4
20
16 10 2
14.6x
14 0 0
12 -10 -2
-20
10 STOXX Europe 600 -4
-30
8 -40 -6
6 -50 -8
00 02 04 06 08 10 12 14 16 18 20 95 97 99 01 03 05 07 09 11 13 15 17 19
Source: Datastream, I/B/E/S, Goldman Sachs Global Investment Research Source: Datastream, I/B/E/S, Goldman Sachs Global Investment Research
Much of the explanation for this could come from the news that the rates of
COVID-19 infection are slowing, and from the speed and scale of the recent policy
support, both monetary and fiscal. Nevertheless, the scale of the economic hit is
likely to be significant. Our economists’ current forecast for the advanced economies is
a Q2 real GDP decline of 11% year-on-year and roughly 35% quarter-on-quarter
annualised, which equates to four times the previous record set in 2008 (with data
28 April 2020 3
going back nearly six decades). Unemployment is also likely to rise sharply, reaching a
postwar record of 15% in the US and as high as 23% in the case of Spain.
The leadership of the market in recent weeks supports the view that it is the
policy support from governments and central banks — which has helped to reduce
tail risks — that has driven the recent rally, rather than a strong increase in growth
expectations. Rather unusually, the recent rally in the equity market has been led by
quality and growth areas of the market. Equally, more defensive markets like S&P and
SMI have outperformed.
Exhibit 6: The market recovery comes from the speed and scale of Exhibit 7: The outperformance of Cyclicals has not been marked in
the recent policy support this rally
Principal Components of our Global Risk Appetite Indicator Europe: Performance around bear markets since 1987
10 130 10th/90th Percentile

Average Cyclicals vs. Defensives
125 Current
5
120
0
115
-5
110
-10
105
-15
Global Growth Factor (RAI PC1) 100
-20 Monetary Policy Factor (RAI PC2) 95
-3m Equity +3m +6m +9m +12m

-25 90 trough
Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Horizon around equity trough in bear markets
Source: Goldman Sachs Global Investment Research Source: Datastream, Goldman Sachs Global Investment Research
In a bear market recovery, history shows that the laggards in the bear market tend to be
the stocks that rally the most in the eventual economic recovery, especially in the early
stages. The R2 of the relationship between bear market performers and recovery
performers over 3 months is particularly high, at 0.84.
Exhibit 8: The most affected sectors during the bear market tend to Exhibit 9: Cyclicals tend to do best in bear market recoveries
be the best performers during the first 3 months of the recovery Performance 12 months after the trough in European bear markets since
Relative price performance vs. the market 1987
30 Banks Sector performance: 50%

+3m after trough 45% Average recovery post bear market
Basic Res. 47%
20 Financials
Svs. 40%
Insurance 39%
R2 = 0.84 35% 37% 37%
10 Real Estate 35%
Cons. & Mats 30% 33%
0 25% 28%
Sector performance: Nov- Food, Bev. &
07 to Mar-09 Retail Tob. 20%
Europe Cyclicals
Stoxx Europe Small
Stoxx Europe Large
Europe Growth
SXXP
Europe Defensives
-10
Europe Value
Drug & Groc.

Utilities
Stores
-20 Telecom
Heatlhcare
-30
-40 -20 0 20 40 60
Source: Datastream, Worldscope, Goldman Sachs Global Investment Research Source: Datastream, Goldman Sachs Global Investment Research
Over a longer horizon than three months into the recovery, the relationship between
bear market laggards and recovery winners becomes less clear. This is most likely
because outperformers tend to become the idiosyncratic winners of the new business
28 April 2020 4
cycle.
Event-driven bear market, with policy support

Despite the market rebound from the March trough, the scale of the economic hit is
likely to be significant. Our economists’ current forecast for the advanced economies is
a Q2 real GDP decline of 11% year-on-year and roughly 35% quarter-on-quarter
annualised, which equates to four times the previous record set in 2008 (with data
going back nearly six decades). Unemployment is also likely to rise sharply, reaching a
postwar record of 15% in the US and as high as 23% in the case of Spain. Our central
view is that the policy support has reduced the likelihood of markets falling below
their previous trough. In this sense, it would have made this bear market very
similar to previous ‘event-driven’ bear markets in history.
Exhibit 10: Event-driven bear markets have recovered after 15 months on average
45 120
Average decline Average length Average time to recover
Months
Months
0
40
100
-10 35
30 80
-20
25
60
-30 20
15 40
-40
10
-50 20
5
%
-60 0 0
Average Structural Cyclical Event Driven Average Structural Cyclical Event Driven Average Structural Cyclical Event Driven
The peak to trough decline of 30-35% in the recent bear market was almost exactly in
line with ‘event-driven’ bear markets in the past. The speed of the falls, like most
event-driven bear markets, was also very fast — although in this case much faster than
average.
We still see this as an ‘event-driven’ bear market. It was unlikely that there would have
been a global recession and falling earnings this year had the virus not have happened;
interest rates were low and private-sector savings were strong.
What we expect from here

Despite the historic scale of the recession that is now unfolding, the scale and size of
policy support is likely to prevent this downturn from morphing into something more
structural with systemic failures in the financial system. But the markets are likely to
have paid too much for the prospect of a return to normal. Investors are usually very
sensitive to inflection points and rates of change. If, as we expect, lockdowns are
partially eased over the next month, the sequential growth will likely look strong (which
is what the equity market is reflecting). But, the pace of growth is still likely to be weak.
As our economists have explained, on a sequential quarter-on-quarter annualised basis
their US forecast shows -34% in Q2, +19% in Q3 and +12% in Q4, which looks rather
V-shaped. But, on a year-on-year basis, their forecast for US growth shows -11% in Q2,
-8% in Q3, and -5% in Q4, which clearly qualifies as U-shaped.
28 April 2020 5
Overall, therefore, their expectation is one in which the economy recovers only
gradually from the virus outbreak but, nevertheless, shows sequential growth
rates in H2 that are unprecedented in postwar history.
We see two likely scenarios from here:
n The first scenario is that the slow progression of the return post lockdown, and the
higher level of unemployment, mean that investors become disappointed relative to
current expectations and markets fall back towards, although likely not through,
previous lows.
n The second scenario is that, having paid up for the recovery, equities get stuck in a
trading range, perhaps ‘Fat & Flat’ with quite a lot of volatility but little
aggregate return for a while.
Of the two, we would assign a slightly higher probability to a further pullback. We think
that the genuine bull market has not started.
Nevertheless, we are getting lots of questions about the likely leadership in the next
years. It is to this topic that we turn next.
28 April 2020 6
2009-2020: Themes of the last bull market
Before looking forward, it is worthwhile thinking about how we got to where we are
now, and how the previous bull market shaped the current environment. The 2009-2020
bull market was unusual in so many ways. Aside from being very long, it was
characterised by several other (often related) defining features:
1. The extent to which equities outperformed earnings, and valuations increased.

2. The outperformance of growth versus value.
3. The leadership of the technology sector.
4. The outperformance of the US equity market relative to the rest of the world.
1. 2009-2020 - Equities outperform profits

The past decade or so, in the aftermath of the financial crisis, was characterised by an
environment of very low inflation (or disinflation) in the real economy as slow growth
and capex were met with rising savings around the world (and, with this, a rising share
of spending on technology). Coupled with historically low interest rates and bond yields,
in part a reflection of low inflation and QE, financial assets thrived in return terms even
as profit growth was generally underwhelming.
We have often demonstrated this strange coexistence of low inflationary pressures in

the real economy and higher inflation of financial assets in Exhibit 11.
Exhibit 11: Wide dispersion between asset price inflation and ‘real economy’ inflation
Total return performance in local currency since January 2009
250%
Asset prices Real Economy prices
200%
150%
100%
50%
0%
-50%
-100%
Commodity
European HY
Gold
US Bond
European CPI
S&P 500
US HY
US IG
MSCI EM
Japan Bond
US House Price
European wages
SXXP
Topix
European IG
US CPI
US wages
EA House Price
MSCI World
Germ. Bond
US Nominal GDP
EU Nominal GDP
Source: Datastream, Haver Analytics, FRED, Goldman Sachs Global Investment Research
This shows that, from the start of the era of QE up until the market peak in February of
this year, financial assets (on the left-hand side of the chart) enjoyed unusually strong
28 April 2020 7
returns, while prices in the real economy (on the right) increased only modestly.
There may be many explanations for this phenomenon but collapsing interest rates in
the wake of the financial crisis, coupled with huge credit creation, are likely to have
been a critical component.
In fact, alongside relatively modest nominal GDP growth and sales growth (see Exhibit
12 and Exhibit 13), earnings growth has generally been quite weak. The strong rise in
equities over the past decade or so has been largely a reflection of rising valuations. As
Exhibit 14 shows, a large proportion of the returns in global equities since the 2009 low
has come from valuation expansion.
Exhibit 12: Long-term real global GDP growth forecast is at a Exhibit 13: Top-line growth has been falling along with declining
historical low nominal GDP
Long-term (6-10y) GDP growth from Consensus Economics yoy sales growth (10y rolling average), Market ex Financials
4.5 10 16% US
4.0 9 14% Europe
3.5 8 World
12%
7 Japan
3.0
6 10%
2.5
4.8 5 8%
2.0 2.0
4 6%
1.5
3
1.4 4%
1.0 2
0.6 2%
0.5 1
Europe US Japan China (RHS)
0.0 0 0%
90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19
Source: Consensus Economics, Goldman Sachs Global Investment Research Source: Datastream, Worldscope, Goldman Sachs Global Investment Research
Exhibit 14: Contribution of dividends, valuations and earnings to total returns

Since Match 9, 2009
450% 429%
400% Dividend contribution

26%
Valuation contribution
350%
Earnings contribution
300% 266%
24% Total Return
250%
208%
35%
200% 156%
146%
150% 48%
36%
35%
50% 44%
100%
46% 77% 24%

50%
30%
32%
0% 6%
-13%
-50%
MSCI AC World S&P 500 STOXX Europe 600 TOPIX MSCI EM
(USD) (USD) (EUR) (JPY) (USD)
Source: Datastream, FactSet, Goldman Sachs Global Investment Research
28 April 2020 8
2. 2009-2020: Concentrated leadership

The other major feature of the cycle from 2009 to 2020 was the leadership, which had
two main characteristics:
1. The outperformance of Growth versus Value.

2. The outperformance of Defensives versus Cyclicals.
Generally, over the post-2008 period, there has been a strong pattern globally of
‘growth’ outperforming ‘value’ (and also of defensive growth companies outperforming
cyclical companies). These trends have made sense in an environment where slow
top-line growth and relatively weak profit growth have pushed up valuations for growth
companies.
There has also been a falling proportion of high-growing companies in most markets. As
Exhibit 15 shows, a split between companies achieving top-line growth above 8% and
below 4% (a simple definition of high versus low growth) shows that global markets
have become increasingly dominated by slow-growing companies in recent years, and
that there is a smaller proportion of fast-growing companies.
Exhibit 15: High growth companies are scarce

MSCI World. Consensus FY3 Sales growth
60% % Companies by Sales Growth band
50%
40%
30%
20%
10%
Low growth (<4%) High growth (>8%)

0%
96 98 00 02 04 06 08 10 12 14 16 18 20
Source: Datastream, I/B/E/S, Goldman Sachs Global Investment Research
At the same time, the relentless falls in global bond yields have boosted the value of
long-duration assets and increased the risk premium of those that are cyclically exposed
to downside economic risks and/or have weak balance sheets.
28 April 2020 9
Exhibit 16: Lower bond yields weigh on European Value stocks
6.0
105
MSCI Europe
Value vs. Growth 5.0
95
4.0
85
3.0
75
2.0
65
1.0
55 0.0
45 German 10y BY -1.0

(RHS)
35 -2.0
07 08 09 10 11 12 13 14 15 16 17 18 19 20
3. 2009-2020 – The success of technology

One of the clearest and most unusual characteristics of the last bear market was the
success of technology. This was true in terms of both EPS and performance.
Exhibit 17 shows the difference between EPS of the global technology sector relative to
the World ex technology. While technology earnings (and margins) reached ever newer
highs, the rest of the world’s profits, at least in aggregate, were rather pedestrian.
28 April 2020 10
Exhibit 17: Tech earnings have outstripped those of the global market
12m trailing EPS (USD) – Indexed to 100 on Jan-2009
300
LTM Earnings
250
World ex Tech
200
World Technology
150 World
100
50
0
88 91 94 97 00 03 06 09 12 15 18
Source: Datastream, Worldscope, Goldman Sachs Global Investment Research
As a result, the technology sector became more important. This was clearest in the US.
The Nasdaq index has grown bigger than the rest of the world’s stock market.
Exhibit 18: US tech is an increasing share of global markets

Ratio between the market cap. of NASDAQ Composite and MSCI World ex. US
1.1x
Nasdaq Composite vs MSCI World ex. US
1.0x (Market Cap in USD)
0.9x
0.8x
0.7x
0.6x
0.5x
0.4x
0.3x
0.2x
0.1x
95 00 05 10 15 20
Source: Bloomberg, Haver Analytics, Goldman Sachs Global Investment Research
The concentration of the index has also increased, with 40% of the Nasdaq market
capitalisation in just four companies. Even in Europe, which has a very low
proportion of companies in this sector, the Technology industry has grown bigger
than the Oil sector and is close in size to the Banks sector (see Exhibit 19 and
28 April 2020 11
Exhibit 20).
Exhibit 19: Healthcare (SXDP) is now roughly twice as big as Exhibit 20: The share of Technology (SX8P) has now overtaken that
Banks (SX7P) in the SXXP of Oil & Gas (SXEP) in the SXXP
25 14
SXXP weight (%) SXXP weight (%)
23
12
21
Europe Healthcare
19 18% 10
17 Europe Technology
8 6%
15
6
13
11 4
9
2
7 Europe Banks Europe Oil & Gas
7% 4%
5 0
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20
Source: Datastream, Goldman Sachs Global Investment Research Source: Datastream, Goldman Sachs Global Investment Research
4. 2009-2020: The outperformance of the US

The staggering outperformance of the US equity market was, of course, a function of
the other factors described above. The US has experienced stronger growth, has more
of a growth bias in its index composition, and has more technology. This is why the
growth in EPS in the US since the previous peak (in 2007) has been so much stronger
than elsewhere. Prior to the current crisis, and since the 2007 EPS peak, S&P earnings
have grown about 90%, compared with roughly 15% in Asia and less than 2% in
Europe.
Exhibit 21: The growth in EPS in the US has been so much stronger than elsewhere
EPS peaked in 2006 for the S&P 500 and Topix and 2007 for SXXP and MXAPJ
100% EPS growth since pre-crisis peak until 2019

90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
S&P 500 MXAPJ TOPIX SXXP
Source: FactSet, Standard and Poor’s, I/B/E/S, Goldman Sachs Global Investment Research
28 April 2020 12
Themes for 2020 and Beyond
To help think about what leadership may look like on a longer-term basis, it is
worth summarising some key factors that are likely to emerge from this crisis.
Perhaps most important among them is an increase in debt, particularly among

governments but also in the corporate sector.
1. High levels of debt – slow nominal growth

One of the most notable implications of this crisis has been the size and scale of
government debt programmes. According to the CRFB (The Center for Budgetary
Responsibility in the US), the US fiscal deficit will exceed $3.8trn (18.7% of GDP) this
year and $2.1trn (9.7% of GDP) in 2021. This is a staggering increase when one
considers that US deficits never exceeded 10% of GDP during the financial crisis.
Meanwhile, they argue, cumulative debt as a percentage of GDP will exceed the record
set right after WWII by 2023.
Exhibit 22: Discretionary fiscal easing in response to coronacrisis

Discretionary policy actions taken since the outbreak that lead to higher government expenditures or lower tax
receipts
Percent of GDP Percent of GDP

8 8
7 7
6 6
5 5
4 4
3 3
2 2
1 1
0 0
World DM EM USA Euro Area Japan* Other China* Asia Ex. CEEMEA Latam
(Big Four) DM China Ex.
Japan
Region DM EM
* GS expected easing
Source: Goldman Sachs Global Investment Research
In Europe, too, increased government debt has become an important issue. Our
economists expect the debt-to-GDP ratio to be pushed above 160% in Italy and to
around 120% in France and Spain. For Italy in particular, they show that under their
baseline assumptions the Italian government would need to run a primary (ex-interest)
surplus of 1.3% of GDP in the years to come to maintain a constant debt-to-GDP ratio at
the new higher level, similar to what has been delivered over the past five years. But the
required primary surplus rises sharply with higher interest rates and lower nominal
growth.
28 April 2020 13
There are many potential implications of higher government deficits. An analysis by the
ECB, which looks at the average impact of government debt on per-capita GDP growth
in 12 Euro area countries over a period of about 40 years starting in 1970, suggests an
inverse relationship between initial debt and subsequent growth, controlling for other
determinants of growth.1 It finds a non-linear impact of debt on growth. The critical
impact seems to be above about 90-100% of GDP. At the same time, there is evidence
that the annual change of the public debt ratio and the budget deficit-to-GDP ratio is
negatively (and linearly) associated with per-capita GDP growth.
Another study by the IMF, based on a panel of advanced and emerging economies over
almost four decades, suggests an inverse relationship between initial debt and
subsequent growth, controlling for other determinants of growth.2 On average, a 10
percentage point increase in the initial debt-to-GDP ratio is associated with a slowdown
in annual real per capita GDP growth of around 0.2 percentage points per year, with the
impact being somewhat smaller in advanced economies. They also find some evidence
of non-linearity, with higher levels of initial debt having a proportionately larger negative
effect on subsequent growth. Their analysis suggests that the adverse effect largely
reflects a slowdown in labour productivity growth, mainly due to reduced investment
and slower growth of capital stock.
Large debt burdens can slow down economic growth and lead to interest payments
consuming an ever larger proportion of the government budget each year, potentially
crowding out private-sector spending. This may be much less relevant today given
interest rates at the lower bound, but there still may be evidence of the so-called
Ricardian Equivalence Theory — that consumers and companies end up saving more in
periods of very high government debt as precautionary savings rise to reflect what they
expect to be higher future taxes, or lower benefits.
Indeed, our Japanese economics team found that an increase in the government debt
ratio reduces consumer spending and increases saving by the generation in the prime of
their working lives. This result is consistent with the results of a Japan Cabinet Office
survey (see Japan Economics Analyst: Japan’s public debt overhang: What could be the
issue?, June 22, 2018).
Lower growth and lower bond yields may not necessarily mean lower valuations for
equities overall – partly, the higher involvement of government may mean lower volatility
of returns and therefore a lower risk premium. But it does suggest that companies
that can generate growth, particularly growth that is predictable and of lower
volatility, will likely outperform and may trade at even higher valuations.
Interestingly, there has already been a tendency for the valuations of companies with a
lower volatility of returns (measured as return on equity) to trade at a higher premium
valuation as bond yields have fallen (Exhibit 23). We would expect this to continue,
particularly because many of the previous trends related to the digital revolution are
1
See Checherita, C. and Rother, P. (2010). The impact of high and growing government debt on economic
growth. An empirical investigation for the Euro Area. ECB Working Paper Series, n. 1237
2
See Kumar, M. S, and Woo, J. (2010). Public Debt and Growth. IMF Working Paper 10/174.
28 April 2020 14
likely to have been strengthened as a result of the lockdowns.
Exhibit 23: Europe: quality companies with a stable ROE have seen their premium increase as bond yields
fell
-20% 5.5
P/B Discount of sectors with High vs. 4.5

-30% Low ROE volatility
3.5
German 10y BY (RHS)
-40%
2.5
1.5
-50%
0.5
-60%
-0.5
-70% -1.5
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20
Low ROE volatility: Healthcare, Industrials, Food & Bev, Retail, Consumer products & Svcs., Drug & Groc. Stores / High ROE volatility: Basic Resources,
Energy, Telecoms, Insurance, Financial Svs, Real Estate
2. Lower inflation and interest rates

Higher debt levels probably mean lower growth, at least after the initial recovery period.
Our economists argue that in most recessions in recent memory, weak demand and
high unemployment have been a reliable recipe for lower inflation. But the inflation
implications of the current recession are a bit more complicated, because the virus
shock will deliver large hits to both demand and supply.
At least in the near term, the impact of the virus is likely to be deflationary. A
collapse in demand and sharp falls in travel and leisure related areas is likely to mean
falls in prices, particularly in the services sectors. Falling rents may contribute to this.
Data from countries in Asia that were affected by coronavirus before Europe and the US
also point to likely lower inflation in the near term; year-over-year core inflation fell in
China, Japan and South Korea in February, driven by declines in services categories
(Exhibit 24). On top of this, the collapse in oil prices is likely to have a disinflationary
impact.
Our economists argue that past recent virus situations were consistent with lower
inflation, particularly in Asia.
28 April 2020 15
Exhibit 24: Inflation Declined in Past Virus Slowdowns
Percent change annualized, 3m avg Percent change annualized, 3m avg

3 10
China, SARS 2003 (Household Articles and Services, left)
8
US, Avian Flu 1957 (Services Less Energy Services, left)
2
Hong Kong, SARS 2003 (Miscellaneous Services , right) 6
4
1
2
0 0
-2
-1
-4
-6
-2
-8
-3 -10
-1 0 1 2 3 4 5 6
Months Since Initial Case
Source: Goldman Sachs Global Investment Research
In the longer run, much will depend on how much capacity destruction occurs as a
result of the crisis and, therefore, how significant are the bottlenecks in supply chains.
This may be very different from the post financial crisis era, where a collapse in the cost
of capital and booming credit markets allowed many weaker companies to remain in
business – a form of zombification (see here and here). But with more businesses
collapsing during the periods of lockdown, and perhaps more consolidation coming out
of this recession, there could be at least selected areas where pricing power increases.
Furthermore, there has been a huge increase in money supply in many countries. While
some would argue that rises in money supply did not cause inflation after the financial
crisis, because the velocity of money fell and savings increased, this time it might be
more so. After all, the general pattern of fiscal tightening after the financial crisis is now
being met with significant fiscal loosening, which could be more inflationary.
28 April 2020 16
Exhibit 25: In the US, the growth in M2 money has spiked
18% US M2 money (yoy)
16%
14%
12%
10%
8%
6%
4%
2%
0%
1959 1965 1971 1977 1983 1989 1995 2001 2007 2013 2020
Source: St. Louis FED, Goldman Sachs Global Investment Research
But there is much disagreement and controversy over the issue of money supply
growth and its impact on inflation. It depends also on how much action there is by
central banks to control inflation (even if it did start to rise), and also questions over the
velocity of money and the extent to which cash is hoarded as a result of greater
uncertainty.
Another factor at play will be what happens to wages. Of course, sharp rises in
unemployment are likely to put downward pressure on wages in general. But with more
people used to working from home, those who need to travel to work may demand
higher wages to reflect risks if there remains no vaccine for some time. Also, the
existence of more generous unemployment benefits may mean that fewer people are
seeking work for a while.
On balance, however, higher unemployment, and with it higher precautionary savings by

both households and corporates, would tend to keep inflation, growth and interest rates
low. This was very much the experience of Japan. After the bubble burst in the late
1980s, there was a massive de-leveraging of private-sector debt which was offset by a
large fiscal deficit. But subsequent long periods of weak growth and crises (the Asian
crisis in 1998 and the global financial crisis in 2008) resulted in continued excess
savings. These savings resulted in very low inflation, and interest rates, despite the large
levels of debt. Such ‘Japanification’ is one possible consequence of this crisis,
particularly in Europe where demographic trends are quite similar and where many of
the same dynamics were evolving even before this crisis (see Global Strategy Paper -
European equities and ‘Japanification’, 1 July 2019).
Some academic studies have used even longer-run data to assess the likely impact on
inflation and interest rates. In particular, a recent study by the Federal Reserve Bank of
San Francisco is based on data going back to the 14th century focusing on 15
28 April 2020 17
pandemics.3 This study argues that the macroeconomic effects of pandemics can last
for ‘about 40 years’, with real rates of return being substantially depressed. They also
argue that there is typically less destruction of capital during pandemics than, say,
during wars, and hence that real interest rates tend to be higher after wars than after
pandemics.
Nevertheless, they also argue that real wages may rise following pandemics, reflecting
labour scarcity. That said, the long dataset includes periods with very high fatality rates
and when output was almost entirely dependent on labour, so is not so relevant today.
So, while the longer-term implications for inflation may be unclear (and if there are
higher prices, it may well be a relative story rather than rises more generally), at least in
the nearer term the size of the demand shock is likely to be more deflationary. This
should support the trend of low interest rates and low nominal growth — again
factors that tend to reinforce the existing trend of relative winners: growth,
defensive growth and strong balance sheet companies.
In the case of the US equity market this has been reflected in the ongoing
strength and concentration of technology companies in the index (more below). In
places like Europe, which has a small proportion of large companies in the digital
economy, the market is increasingly concentrated in a small number of stable
growth compaines that we dub the GRANOLAS. The Top European companies:
Glaxosmithkline, Roche, ASML, Nestle, Novartis, Novo Nordisk, L’Oreal, LVMH,
Astrazeneca, SAP, Sanofi. These have relatively strong balance sheets, low
volatility growth and good dividend yields, around 2%-2.5% (much higher than
other asset classes).
Exhibit 26: FAAMG leadership Exhibit 27: GRANOLAS leadership

FAAMG: Facebook, Amazon, Apple, Microsoft, and Alphabet’s Google GRANOLAS: Glaxosmithkline, Roche, ASML, Nestle, Novartis, Novo
Nordisk, L’Oreal, LVMH, Astrazeneca, SAP, Sanofi
25% Market cap of 25% Market cap of

FAAMG stocks GRANOLAS stocks 24%
as % of S&P 500 as % of STOXX 600
20% 20% 20%
15% 15%
10% 10%
5% 5%
0% 0%
90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20
3. The continuation of the digital revolution

Technology was the main sectoral winner in the last cycle. It is likely to be so for some
time to come. True, the FAANG stocks are bigger than the annual GDP of Japan, and the
3
See Faria e Castro, M. (2020) Fiscal Policy during a Pandemic. St. Louis FED Working Paper 2020-006D.
28 April 2020 18
Tech giants are bigger than the annual GDP of Germany. But these companies, or at
least the areas and businesses that they represent, are transforming the way that
business is done and how consumers consume.
As we pointed out in Why Technology is not a bubble; lessons from history, the
leadership of this sector is likely to continue, and these stocks are not as expensive as
we have seen in previous periods of ‘growth leadership’ (see Exhibit 29). If anything, the
nature of the current crisis has only accelerated these existing trends: companies are
more likely to move onto the cloud, consumers are more likely to shop on line. The
backdrop of likely low bond yields and growth continues to make companies that do
have growth more attractive. We do not think this has changed.
Yes, there are likely to be challenges and risks to particular companies. The boom in
technology ‘concept stocks’ that were largely funded out of private equity may have
peaked as the cost of capital rises. Also, there are risks, depending on political
developments, of higher taxation and regulation for some companies in the technology
world. But the digital and data revolution that is changing our world, its economy,
the health care system and how we consume is still underway. Companies that
can grow as a result are likely to be attractive to growth-starved investors, just as
companies that have sustainable balance sheets and an ability to pay steady and
predictable dividends are likely to be in great demand in a yield-starved world.
Exhibit 28: Comparison of GDP and market value of various countries, indices and Technology companies
2019 Nominal GDP. USD trn
7.0 Country GDP

6.1
6.0 Company MV
5.1 4.8
5.0 Index MV
3.9 3.8
4.0
3.0 2.8 2.8
3.0 2.7
2.2 2.0
1.9 1.8 1.8 1.7 1.7 1.6
2.0 1.3 1.2 1.2 1.1
0.9
1.0 0.5 0.5 0.5
0.0
AAPL+MSFT+AMZN
Tencent Holdings
FAMG
Alphabet
South Korea
FAAMG
Japan
India
Russia
Apple
Amazon.Com
CAC 40
Alibaba Group
France
Brazil
Italy
GRANOLAS*
Canada
Euro STOXX 50
DAX
Germany
Topix
Facebook
Microsoft
United Kingdom
GRANOLAS: Europe Top 10 (Glaxosmithkline, Roche, ASML, Nestle, Novartis, Novo Nordisk, l’Oreal, LVMH, Astrazeneca, SAP, Sanofi)
Source: Datastream, FactSet, Goldman Sachs Global Investment Research
28 April 2020 19
Exhibit 29: Largest companies in tech today, tech 1990s and Nifty Fifty
Size Valuation
Market weight Market Cap ($ Bn) P/E (FY2)
FAAMG
Apple 4.9% 1164 19.1
Amazon 4.3% 1021 60.6
Microsoft 5.6% 1328 28.4
Alphabet 3.4% 793 23.0
Facebook 1.8% 434 19.6
FAAMG Aggregate 20.2% 4740 23.0
Tech Bubble
Microsoft 4.5% 581 55.1
Cisco Systems 4.2% 543 116.8
Intel 3.6% 465 39.3
Oracle 1.9% 245 103.6
Lucent 1.6% 206 35.9
Tech Bubble Aggregate 15.8% 2040 55.1
Nifty 50
IBM 7.1% 48 35.5
Eastman Kodak 3.6% 24 43.5
Sears Roebuck 2.7% 18 29.2
General Electric 2.0% 13 23.4
Xerox 1.8% 12 45.8
Nifty 50 Aggregated 17.1% 116 35.5
Tech Bubble data as of 24/03/2000, Nifty 50 data as of 02/01/1973, except 1972 actual for P/E
4. Diversification of supply chains

There has been a growing discussion about the impact of the coronavirus on
globalisation in general, and supply chains in particular. In some ways, the
pushback on the years of globalisation had already begun with a shift in the political
climate. The trade war had fractured the belief that globalisation was without limit.
Technology companies, once seen as benign liberators of our time and leisure, were
being questioned for their tax policies and use of data.
As we show below, the peak in investments in Asia and China by European companies
happened almost a decade ago.
Exhibit 30: Geographical asset exposure of European companies Exhibit 31: Geographical capex exposure of European companies
STOXX 600 ex Financials STOXX 600 ex Financials
30%
35%
25% 30%
Asia Pacific EM Asia Pacific EM
25%
20%
20%
15%
15%
10%
10%
5%
5%
0% 0%
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
But the coronoavirus has also gone some way further, at least in the corporate
sector, to raise questions about the reliability and dependence on supply chains.
This pandemic is unusual because it has combined a demand shock with a supply shock
28 April 2020 20
in many industries. Sectors as varied as car manufacturers, pharmaceutical companies

and industrial electronics manufacturers have all been affected by disrupted shipments
from China. Many companies are now questioning the complexity of their supply chains
and the extent to which they rely on China. Although many companies have diversified
production away from China towards cheaper locations in South East Asia in recent
years, many of these manufacturing plants are also dependent on China for components
and other inputs.
This pattern is likely to be increasingly supported by governments. The new EU

trade commissioner, Phil Cogan, in his recent statement to the EU argued:
“We need an evidence-based discussion on what it means to be strategically

autonomous. For example, we need to look at how to build resilient supply chains,
based on diversification, acknowledging the simple fact that we will not be able to
manufacture everything locally”.4
Of course, any localisation and diversification of supply chains would have differential
effects across the corporate sector. Some local manufacturers of components would
benefit, while the users might suffer from higher costs. In general, any reversal of
globalisation, particularly if it takes the form of higher tariffs or costs, is likely to be a
negative for corporate margins and growth.
5. Lower profit margins

One of the consequences of the rising debt levels that came about as a result of the
financial crisis was the adoption of tighter budget deficits or programmes of austerity.
But is it realistic for governments to impose new programmes of severe austerity on
their populations? This seems much less likely now, particularly because many people
see that public services have been a critical part of the solution and therefore cannot be
cut back, and perhaps should even be expanded.
An alternative from a budgetary control standpoint may be higher taxation, particularly

on the corporate sector which has, in many countries, enjoyed sharp falls in tax burdens
in recent years (Exhibit 32). This, coupled with selectively higher wages (perhaps), is
likely to be negative for profit margins.
4
See Introductory statement by Commissioner Phil Hogan at Informal meeting of EU Trade Ministers, April
16, 2020.
28 April 2020 21
Exhibit 32: Average global statutory corporate income tax rate (94 Exhibit 33: Effective corporate tax rate ex Oil & Gas
jurisdictions; excluding zero-rate jurisdictions)
Shaded area: Top/Bottom tercile
50%
35
UK - FTSE 350
33 45%
France - SBF 120
31 40% Germany - CDAX
29 US - S&P 500
35%
27
30%
25
25%
23
21 20%
19 15%
00 02 04 06 08 10 12 14 16 18 20 1985 1990 1995 2000 2005 2010 2015
Source: Haver Analytics, Goldman Sachs Global Investment Research Based on the current index constituents
Over recent years, companies have enjoyed record rises in profit margins. In the US,
there have already been signs in the broader national income data that profit shares of
GDP were coming down. This might accelerate in the light of a change in the fiscal
focus.
Exhibit 34: The US profit share of GDP has been falling, but this has not been reflected in S&P 500 net
margins
14% US profits’ share of GDP S&P Net Income Margins 11%

(RHS)
13% 10%
12% 9%
11% 8%
10% 7%
9% 6%
8% 5%
7% 4%
6% 3%
5% 2%
’50 ’55 ’60 ’65 ’70 ’75 ’80 ’85 ’90 ’95 ’00 ’05 ’10 ’15 ’20
Source: Haver Analytics, Compustat, Goldman Sachs Global Investment Research
6. Competition and consolidation

In the aftermath of the financial crisis, interest rates collapsed and credit markets grew
sharply. A search for yield resulted in a boom in financing and, as a consequence, there
was little capacity destruction. M&A activity remained very subdued in the years
following the crisis.
28 April 2020 22
Exhibit 35: US M&A activity Exhibit 36: In Europe, M&A did not pick up in front of this crisis
Target: US listed companies. M&A volumes aggregated by completion Target: European listed companies. M&A volumes aggregated by
date completion date
1200 800 EUR Bn.

USD Bn.
Domestic buyer Foreign buyer 700
1000 Domestic buyer Foreign buyer
600
800
500
600 400
300
400
200
200
100
0 0
00 02 04 06 08 10 12 14 16 18 YTD 00 02 04 06 08 10 12 14 16 18 YTD
Source: Bloomberg, Goldman Sachs Global Investment Research Source: Bloomberg, Goldman Sachs Global Investment Research
In the US, in particular, funds were increasingly used to buy back shares via equity for
debt swaps.
The aftermath of this crisis is likely to be different. There is likely to be more capital
destruction: we see this clearly, for example, in the oil industry. But it is also likely in
many industries given the cash flow impact of lockdowns. We have also seen a record
higher premium for companies with strong balance sheets. This means that stronger
companies are likely to be in a better position to acquire competitors and strengthen
market.
Exhibit 37: US Strong and Weak Balance Sheet baskets Exhibit 38: Europe Strong and Weak Balance Sheets baskets
Relative price performance vs. S&P 500. Indexed in 2014 Relative price performance vs. STOXX Europe 600. Indexed in 2014
125 180
US Strong Balance Sheets
120 Europe Strong Balance Sheets
(GSTHSBAL)
160 (GSSTSBAL)
115
110 140
105
120
100
Europe Weak Balance Sheets
95 100 (GSSTWBAL)
US Weak Balance Sheets
90 (GSTHWBAL)
80
85
80 60
14 15 16 17 18 19 20 14 15 16 17 18 19 20
Source: Bloomberg, Goldman Sachs Global Investment Research Source: Bloomberg, Goldman Sachs Global Investment Research
7. The ‘Social Contract’

The current crisis is very different from the financial crisis in many respects. But one of
the ‘positive’ factors is that no particular sector of society or industry is responsible.
Societies have pulled together in many respects to focus on the problem. But the
extraordinary support given by governments is likely to mean more focus on companies
being part of the solution.
Our Utitlities analysts investigated the EU Green Deal in a post-Covid world and the
28 April 2020 23
logic that underpins the ongoing support for “net zero” climate policies, as already
widely stated by several governments and politicians. Net zero investments in
renewables and power grids could amount to €2.6 trillion, they estimate, by 2050 or
>€80bn pa. For their main Climate Champions, this could drive average double-digit EPS
CAGRs to 2030E.
Encouragingly, there have been many examples of companies helping with innovation,
drug development, healthcare systems, ensuring access to telephone capacity, and
many more. Prior to this crisis there was a meaningful and increasing focus on ESG
investing and it is likely that this focus will only increase following the coronavirus. In
addition to the environmental focus, the emphasis on corporate responsibilities towards
stakeholders, including employees and suppliers, is likely to grow. As a function of
government intervention, or just moral persuasion, shareholder value in the form of
share buybacks, and dividend payments may be less prioritised. This suggests that
strong balance sheet ‘quality’ companies that have high ESG standards are likely to be
increasingly valued.
Conclusions
The last bull market was characterised by four main trends:
n Rising valuations as price performance outstripped earning performance.

n The outperformance of ‘growth’ versus ‘value’.
n The leadership of the technology sector.
n The outperformance of the US equity market relative to the rest of the world.
The next cycle, whether it becomes a strong bull market or not, is less likely to be
driven by valuation expansion as interest rates are at their lower bound. But some
key drivers are likely to shape the difference between relative leaders and
laggards:
1. High debt levels, and low nominal growth.
2. Low levels of inflation and (at least in the near term) inflation.
3. Continued digital revolution.
4. More diversification of supply chains.
5. Downward pressure on margins.
6. Greater consolidation.
7. Greater focus on the’social contract’ and ESG.
To this end, there are likely to be three investment conclusions:
1) Growth will remain scarce: growth companies will continue to prosper.
2) Income will remain scarce: sustainable dividend payers will prosper.
3) Debt levels will be higher: strong balance sheet companies will prosper.
28 April 2020 24
In the US, this is still likely to be concentrated in the Technology space. In Europe,
we think it is reflected in what we dub the GRANOLAS. The Top European
companies: Glaxosmithkline, Roche, ASML, Nestle, Novartis, Novo Nordisk, L’Oreal,
LVMH, Astrazeneca, SAP, Sanofi. These have relatively strong balance sheets, low
volatility growth and good dividend yields, around 2%-2.5% (much higher than other
asset classes).
Certainly, at a genuine inflection point in the economy we are likely to see a powerful
rotation towards cyclical, high beta and weaker balance sheet companies. But, unless
the underlying fundamentals of low nominal growth, bond yields and earnings change,
or there is a significant challenge to the digital revolution, we would see such rotations
as tactical not secular.
To this end, the continued outperformance of ‘growth’ versus ‘value’ does look set
to continue. Certainly, at a genuine inflection point in the economy we are likely to see
a powerful rotation towards cyclical, high beta and weaker balance sheet companies.
But, unless the underlying fundamentals of low nominal growth, bond yields and
earnings changes, or there is a significant challenge to the digital revolution, we would
see such rotations as tactical not secular.
Exhibit 39: The continued outperformance of ‘growth’ versus ‘value’ does look set to continue
Relative price performance in local currency
180
Growth outperforming
170
World Value vs Growth
160
150
140
130
120
110
100
90
80
1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
28 April 2020 25
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Investing in 2020 & Beyond: Global Strategy Paper

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PORTFOLIO STRATEGY RESEARCH | April 28, 2020 | 5:05AM BST

GLOBAL STRATEGY PAPER NO. 37

GROWTH VALUE DEBT Sharon Bell, CFA

• High debt levels, and low nominal growth.

To this end, there are likely to be three investment conclusions:

• Growth will remain scarce: growth companies will continue to prosper.

The Goldman Sachs Group, Inc.

Has a new bull market started?

Exhibit 1: Has a new bull market started?

Source: GFD, Datastream, Goldman Sachs Global Investment Research

Source: GFD, Datastream, Goldman Sachs Global Investment Research

155 10th/90th Percentile

-9m -6m -3m +3m +6m +9m

Source: Datastream, Goldman Sachs Global Investment Research

10 130 10th/90th Percentile

-20 Monetary Policy Factor (RAI PC2) 95

-3m Equity +3m +6m +9m +12m

30 Banks Sector performance: 50%

Stoxx Europe Small

Stoxx Europe Large

Drug & Groc.

Event-driven bear market, with policy support

Source: GFD, Datastream, Goldman Sachs Global Investment Research

What we expect from here

We see two likely scenarios from here:

2009-2020: Themes of the last bull market

1. The extent to which equities outperformed earnings, and valuations increased.

1. 2009-2020 - Equities outperform proﬁts

We have often demonstrated this strange coexistence of low inﬂationary pressures in

Exhibit 14: Contribution of dividends, valuations and earnings to total returns

400% Dividend contribution

46% 77% 24%

Source: Datastream, FactSet, Goldman Sachs Global Investment Research

2. 2009-2020: Concentrated leadership

1. The outperformance of Growth versus Value.

Exhibit 15: High growth companies are scarce

60% % Companies by Sales Growth band

Low growth (<4%) High growth (>8%)

Source: Datastream, I/B/E/S, Goldman Sachs Global Investment Research

Exhibit 16: Lower bond yields weigh on European Value stocks

45 German 10y BY -1.0

Source: Datastream, Goldman Sachs Global Investment Research

3. 2009-2020 – The success of technology

Source: Datastream, Worldscope, Goldman Sachs Global Investment Research

Exhibit 18: US tech is an increasing share of global markets

Source: Bloomberg, Haver Analytics, Goldman Sachs Global Investment Research

4. 2009-2020: The outperformance of the US

100% EPS growth since pre-crisis peak until 2019

Themes for 2020 and Beyond

Perhaps most important among them is an increase in debt, particularly among

1. High levels of debt – slow nominal growth

Exhibit 22: Discretionary ﬁscal easing in response to coronacrisis

Percent of GDP Percent of GDP

Source: Goldman Sachs Global Investment Research

likely to have been strengthened as a result of the lockdowns.

P/B Discount of sectors with High vs. 4.5

Source: Datastream, Worldscope, Goldman Sachs Global Investment Research

2. Lower inﬂation and interest rates

Exhibit 24: Inﬂation Declined in Past Virus Slowdowns

Percent change annualized, 3m avg Percent change annualized, 3m avg

Source: Goldman Sachs Global Investment Research

Exhibit 25: In the US, the growth in M2 money has spiked

18% US M2 money (yoy)