YouSaid · the spoken record

Andrew Lapthorne

lines on the record: 21
first: 2016-09-27
most recent: 2016-09-27
sittings or episodes: 1
sources: podcast

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“And geopolitical risks have started to grow again. And in many countries, you're seeing politics become more polarised and therefore more of a risk for investors, particularly alongside more regulation. So it is a much tougher environment for returns in financial assets, I think. And one needs to be realistic and recognize that. But if it is a world where inflation remains low, in real terms there are still decent returns to find. And I still think in a world where growth is relatively scarce and where interest rates are low, so income is scarce, investors will still reward companies, sectors, investments that offer those opportunities, sustainable, relatively predictable growth with some pickup in yield. And there are still areas that we can find that fit into those categories. And I think the remain very much in demand as we move forward.”
2016-09-27 · Goldman Sachs Exchanges · The Evolution of the 'Long Good Buy' · IDENTIFIED FROM THE TRANSCRIPT
“Down that was good for risky assets which also re rated, but at the same time as we move towards the end of the 1980s, global risks started to fade as well. We had the sort of peace dividend after the Berlin Wall fell and the collapse of communism. Many political parties moved to the centre ground. So for a sort of 25-year period, you were seeing very little risk for investors, better growth, lower cost of capital because lower interest rates. It was a very, very good time to invest in financial assets, particularly risky ones. If you think about it today, we've already reached, as we were discussing, a little bit the limits of monetary policy. Interest rates are already close to zero, so they're not likely to fall further. And if they did, that almost certainly would be a negative. We're starting to see slower global growth after the extraordinary period of globalization of the last 10 or 20 years.”
2016-09-27 · Goldman Sachs Exchanges · The Evolution of the 'Long Good Buy' · IDENTIFIED FROM THE TRANSCRIPT
“Well, I think the current recovery generally has been weak compared to those that we've seen coming out of recessions in the post-war period, for example. And it is a very unusual environment where we have such low interest rates and very low inflation. And we have valuations of risky assets at high levels as we were discussing earlier. It's difficult to find a precise analogue. But I also think we need to put things into some historical comparison. If we think about the great bull markets of risky assets like equities that we've seen leading up to the financial crisis, they really had their roots in the early 1980s. That's when they really started. And it coincided with the global peak of inflation, a completely different period where interest rates were coming off extremely high levels. And as inflation was squeezed out of the system, interest rates came down, bond yields came down.”
2016-09-27 · Goldman Sachs Exchanges · The Evolution of the 'Long Good Buy' · IDENTIFIED FROM THE TRANSCRIPT
“It's probably because long-term growth remains very weak. So one way or another you are likely to be stuck in this lower level of returns, lower level of growth, kind of equilibrium. However, if we were to get into a phase where US interest rates had to rise much more quickly than the market is pricing, I think it's quite possible that vulnerabilities in some emerging economies would come back into the market focus. And that's another reason why sharply rising US rates, either at the short end or...”
2016-09-27 · Goldman Sachs Exchanges · The Evolution of the 'Long Good Buy' · IDENTIFIED FROM THE TRANSCRIPT
“Well, what they're saying is that the markets have become too sanguine, too relaxed about the prospects for interest rates, both policy rates here in the US, but also long-term interest rates, bond yields. If you get slightly higher inflation than people are currently pricing or growth is stronger, you will likely see a tightening of monetary policy bond yields will pick up. What we're really saying is that given you now have quite high valuations across different asset classes, government bonds but also equities, higher bond yields will probably trigger some weakness in asset prices that will keep you still in that fat and flat range that we've been discussing. It's very difficult to see markets breaking out significantly on the upside if we were to see bond yields picking up. And at the same token, if bond yields stay at these very low levels,”
2016-09-27 · Goldman Sachs Exchanges · The Evolution of the 'Long Good Buy' · IDENTIFIED FROM THE TRANSCRIPT
“some squeezer margins which will contribute to slower profit growth. And I think again it's a reflection of this trade off between movements in prices and in interest rates on the one hand and growth on the other which will really constrain the US still in this sort of fat and flat range.”
2016-09-27 · Goldman Sachs Exchanges · The Evolution of the 'Long Good Buy' · IDENTIFIED FROM THE TRANSCRIPT
“Well, I think in terms of asset markets they do tend to be pretty correlated globally, so they tend to move directly together, although you get big differences on a relative basis. And certainly the US, when we think of equity markets, has been an outstanding winner really from the start of US QE some years ago, the US banking system was strengthened relatively quickly in the financial crisis, the economy has grown. And it's really been seen as a stable grower, a low volatility, safe place to be. And the US has outperformed dramatically. There are signs of improvement here, certainly, but as you say, you're getting close to a point of full employment, wages are picking up, but you have to bear in mind this is happening at a time when US corporate profits are at a record high and corporate profit margins are at a record high, and these higher wages may bring”
2016-09-27 · Goldman Sachs Exchanges · The Evolution of the 'Long Good Buy' · IDENTIFIED FROM THE TRANSCRIPT
“You do, and you also can look back over the last sort of 25 years and see that since 1990, there have been something like 25 different fiscal expansion programs. And as yet, we still... not seen a dramatic recovery in activity, and indeed the equity market tended to typically rally into those announcements, but then pull back as they somewhat underwhelmed. At the margin we are shifting to a period where the stars are aligning a little bit for fiscal expansion, both politically and because bond yields are very low, so it's easier for governments to fund and borrow at very cheap rates. But there are political constraints which make the reality a little bit more complex and may not come as urgently as many investors would hope.”
2016-09-27 · Goldman Sachs Exchanges · The Evolution of the 'Long Good Buy' · IDENTIFIED FROM THE TRANSCRIPT
“You tend to get higher interest rates, and that again brings back into play precisely the tensions that we've been discussing today and we look at in our report, this sort of trade-off between growth and interest rates. It's also true, of course, that fiscal policy expansion can take different forms. It could be tax cuts, it could be big, long dated investment projects, and the payoff from these things tends to vary.”
2016-09-27 · Goldman Sachs Exchanges · The Evolution of the 'Long Good Buy' · IDENTIFIED FROM THE TRANSCRIPT
“If you look at the impact of monetary policy, certainly if we break down equity markets and look at different industries, we tend to find that falling rates, particularly when they get to such low levels, are quite bad for very economically sensitive cyclical industries, particularly bad for financials. And on a relative basis, they tend to be good for companies that are quite defensive, that have some yield because in a very income-scarce world, companies with yield become very attractive. In an environment where fiscal policy expands, things tend to shift a little bit. People want to be more exposed to the prospects of economic activity improving, so more cyclical, economically sensitive sectors do tend to do better. That's one thing I think to look out for. But of course typically with more public spending comes higher cost of funding.”
2016-09-27 · Goldman Sachs Exchanges · The Evolution of the 'Long Good Buy' · IDENTIFIED FROM THE TRANSCRIPT
“Well, I think there has been a bit of a sea change, a shift in sentiment really from the early summer of this year. At that stage, interest rates pretty much everywhere, at least policy rates had reached zero or very close. Monetary policy both conventional and unconventional like QE was really losing its potency. It was losing its efficacy. And I think the turning point really was somewhere around the middle of this year. And to some degree, supported by the growth of popularism and sort of political zeitgeist of focusing a little bit more on the lack of wage growth and economic activity, there's a narrative building up that fiscal policy is going to be a much more central platform or focus for policymakers as we move forward in time.”
2016-09-27 · Goldman Sachs Exchanges · The Evolution of the 'Long Good Buy' · IDENTIFIED FROM THE TRANSCRIPT
“And that's helped to boost the value of the stock market. The very domestically exposed companies in the UK did have an initial sharp negative reaction from the uncertainty, but because so far the macro data hasn't really deteriorated, they too have seen quite a big bounce, and that's also been reflected in the more positive tone in equity markets generally in the last couple of months. So I think a lot that happens in the UK will really depend on the mix of the exchange rate moves and interest rates. But then ultimately what's happening to growth as these negotiations really start to get underway.”
2016-09-27 · Goldman Sachs Exchanges · The Evolution of the 'Long Good Buy' · IDENTIFIED FROM THE TRANSCRIPT
“Consequences yet. In real terms, nothing yet has happened. So that could happen in time. From a financial market perspective, the notable things we've seen are that bond yields have fallen in the UK. The level of interest rates have come down, partly prompted by further easing from the Bank of England, but also alongside that sterling has weakened against both the dollar and the euro. And that's actually helped the equity market to go up. Bear in mind that when you look at the main liquid equity indices, for example the FTSE 100, about 80% of the revenues of those companies are coming from outside of the UK. They're very global companies. They benefit a lot from this one-off fall in sterling.”
2016-09-27 · Goldman Sachs Exchanges · The Evolution of the 'Long Good Buy' · IDENTIFIED FROM THE TRANSCRIPT
“Well, I think it's important to differentiate between the economy and markets. So far the economic fallout has been less than many people expected. The real economy. The real economy. You've seen consumer sentiment holding up better than many people would have expected given the surprise outcome for many. Exports have been strong largely because the currency is weakened. But it's important to say that it's early days. And remember the Article 50, the legal document to start the process of negotiations.”
2016-09-27 · Goldman Sachs Exchanges · The Evolution of the 'Long Good Buy' · IDENTIFIED FROM THE TRANSCRIPT
“Without the flares, let's say. But what we're thinking here is an environment where you do get, because of, for example, full employment, wages going up, and that pushes up inflation, pushes up interest rates and bond yields, but that squeezes profit margins, you get low profit growth, and you don't really get the positive economic boost from fiscal policy that people imagine, either because it doesn't happen or because you get fiscal spending, but it just doesn't have the positive effect that people hope for. And that's a more negative combination. And I think would imply that you get lower valuations, both of bond markets as bond yields go up and prices fall, but also of equities where they derate.”
2016-09-27 · Goldman Sachs Exchanges · The Evolution of the 'Long Good Buy' · IDENTIFIED FROM THE TRANSCRIPT
“That really explains the third of the options we looked at, which is what we call reflation. And this is the environment where you do get better growth than people have imagined more recently, perhaps because of more fiscal spending. But with that, there's a cost. And the cost is that inflation picks up a bit. And so interest rates and bond yields rise. And that really caps equity valuations. It's not valuation that drives the markets higher, but slightly better profit growth because of better economic activity.”
2016-09-27 · Goldman Sachs Exchanges · The Evolution of the 'Long Good Buy' · IDENTIFIED FROM THE TRANSCRIPT
“Higher rates. And that would be very different environment to fat and flat because it would mean that in that world, although valuations are still already high, they could probably even go higher and you get some better profit growth, some better economic growth as well.”
2016-09-27 · Goldman Sachs Exchanges · The Evolution of the 'Long Good Buy' · IDENTIFIED FROM THE TRANSCRIPT
“Well, the opposite almost of that is what we describe as Goldilocks, sort of everything going right. And there's been a bit of a sense of that just recently in the way that markets have behaved. And the idea here would be, for example, that you remain in a very, very low interest rate world. The Federal Reserve remains dovish. They see no urgency to raise interest rates. Bond yields stay low. But alongside that, you're seeing an environment where fiscal policy becomes a option for governments. They can borrow money very cheaply because bond yields are low, they start to boost fiscal spending and growth improvement.”
2016-09-27 · Goldman Sachs Exchanges · The Evolution of the 'Long Good Buy' · IDENTIFIED FROM THE TRANSCRIPT
“Having said that, there are different ways in which it can evolve from here, and our recent report really tries to focus on those. We have talked since the beginning of this year of a equity market environment that we describe as fat and flat. What we mean by this is that relatively flat returns in aggregate, because valuations have already kind of reached their limit as interest rates are now close to zero, and the returns will be driven by lower profit growth. And the fat part of it is a kind of description of a trading range where you go from occasional fears about economic downturns and deflation, as we were seeing in January of this year, to occasional bouts of optimism about reflation, and that's really been what we've seen since July, I think.”
2016-09-27 · Goldman Sachs Exchanges · The Evolution of the 'Long Good Buy' · IDENTIFIED FROM THE TRANSCRIPT
“Well, the reason we argued it was a longer buy, a great opportunity for investors in riskier assets like equities back then was not because the future in twenty twelve seemed very certain, but that valuations were very low, and we thought investors were being, if you like, rewarded for taking some risk. As you quite rightly say, Jake, three or four years later, valuations have gone up a lot in all financial assets because bond yields have fallen. And that makes the absolute argument harder to make. We think absolute returns in financial assets will be lower moving forward. But on a relative case, we still think there are better risk adjusted opportunities in equities than bonds. So the case underlying longer buy, I think, still holds.”
2016-09-27 · Goldman Sachs Exchanges · The Evolution of the 'Long Good Buy' · IDENTIFIED FROM THE TRANSCRIPT
“So Peter, since 2012, you've published a series of reports on what you've called the long goodbye, which is not a Raymond Chandler novel, but B-U-Y. An argument that's favored stocks over bonds. Stock valuations around the world have risen significantly over that span. How is your view changed and what are the various scenarios going forward?”
2016-09-27 · Goldman Sachs Exchanges · The Evolution of the 'Long Good Buy' · IDENTIFIED FROM THE TRANSCRIPT