WEBVTT - Goldman Sachs Chief Global Equity Strategist Peter Oppenheimer Talks 

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, Radio News.

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<v Speaker 2>We'll begin the sour stocks pushing Kai looking to snap

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<v Speaker 2>a three day losing streak as countries rushed to the

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<v Speaker 2>negotiating table. Peter Roppenheimer of Garment SAX, writing, we would

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<v Speaker 2>argue that we are in an event driven bear market

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<v Speaker 2>triggered by taris. However, it could easily morph into a

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<v Speaker 2>cyclical bear market given growing recession risk. Peter joins us

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<v Speaker 2>now for more, Peter, welcome to the program, sir, It's

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<v Speaker 2>good to see you. What's the difference between the two

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<v Speaker 2>Why is that distinction so important this morning?

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<v Speaker 3>Well, actually, the distinction is not that much when you

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<v Speaker 3>look at the typical falls that you tend to get

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<v Speaker 3>in both cases, the falls on average in equities are

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<v Speaker 3>roughly about thirty percent. There's a reasonable distribution around that

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<v Speaker 3>that's the average. But mainly they're distinguished by how long

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<v Speaker 3>it takes for the market to fall and then recover.

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<v Speaker 3>And in what we call a ven driven bear markets,

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<v Speaker 3>that process is a lot faster. What's the difference between

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<v Speaker 3>them to well, a venture of in bear markets, as

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<v Speaker 3>we call them, something that's sort of triggered by an

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<v Speaker 3>exogenous shop an event like tariffs that really just forces

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<v Speaker 3>the economy off its previous track, whereas a cyclical one.

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<v Speaker 3>The most common type of bear market we see in

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<v Speaker 3>equities is really about recessions. So the critical thing from

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<v Speaker 3>here really is to what extent investors really start to

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<v Speaker 3>fully price the recession, which would imply profits for and

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<v Speaker 3>equity evaluations have further to declineter.

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<v Speaker 1>I guess we're trying to figure out how much the

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<v Speaker 1>damage is being done by just simply uncertainty, and how

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<v Speaker 1>much the damage is being done by actual profit margin

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<v Speaker 1>contraction by consumers facing off higher prices, which is the

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<v Speaker 1>bigger impetus for some sort of recession at this point

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<v Speaker 1>in your.

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<v Speaker 3>Mind, well, I think one of the triggers here is

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<v Speaker 3>you say, is uncertainty. In the end, uncertainty is the

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<v Speaker 3>enemy of activity and of risk assets, because what tends

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<v Speaker 3>to happen is that both investors and companies as well

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<v Speaker 3>as consumers tend to just hold back decisions appalled, and

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<v Speaker 3>that results in slowing activity. But obviously as economy is slow,

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<v Speaker 3>then you tend to get other sort of factors that

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<v Speaker 3>come into play. Now, the good thing I would say

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<v Speaker 3>is that there are some important underlying supports of economic activity.

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<v Speaker 3>Private setor balance sheets generally are quite strong, both corporates

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<v Speaker 3>and banks. Of course, there's also room generally for central

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<v Speaker 3>banks to be cutting interest rates, which will be helpful

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<v Speaker 3>in time and is usually one of the necessary conditions

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<v Speaker 3>before equities really recover from a bare phase. But I

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<v Speaker 3>think at the moment this is really about uncertainty and

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<v Speaker 3>about investors trying to calibrate how far economy is slow

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<v Speaker 3>and for how long.

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<v Speaker 1>Yesterday's price action was interesting to me, Peter, because it

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<v Speaker 1>highlighted the fragility of the liquidity in the market on

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<v Speaker 1>all sides. Just this idea that why would anyone have

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<v Speaker 1>conviction to buy right now when you could be blown

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<v Speaker 1>out of the water by just simply a headline there's

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<v Speaker 1>unsourced that comes out and then gets reversed fifteen minutes later.

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<v Speaker 1>How much is that kind of volatility if it persists

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<v Speaker 1>enough for you to actually lower your forecast yet again

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<v Speaker 1>for the s and p.

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<v Speaker 3>Well, I think the critical issue here again comes back

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<v Speaker 3>to whether there's likely to be a recession or not.

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<v Speaker 3>Our economists believe that the probability of a recession in

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<v Speaker 3>the US, for example, over the next twelve months is

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<v Speaker 3>now around forty five percent. But indeed, if the full

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<v Speaker 3>expected tariffs come through and there is no pullback, that

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<v Speaker 3>would likely trigger a recession. And look, in a recession

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<v Speaker 3>typically profits due fall anywhere from sort of ten to

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<v Speaker 3>twenty percent or more, depending on what industry is there

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<v Speaker 3>in and in what regions. And of course if investors

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<v Speaker 3>start to price that as a likely outcome the most

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<v Speaker 3>likely outcome, then equity indexes have further to decline as

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<v Speaker 3>a price in lower profits and probably a lower valuation

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<v Speaker 3>as well. So you know, we still have downside in

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<v Speaker 3>the short run in our targets. But I think also

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<v Speaker 3>the source of conditions you're likely to see to really

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<v Speaker 3>sustain a base in equity markets for a proper recovery,

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<v Speaker 3>and not really yet there, I would say, Peter.

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<v Speaker 1>At the beginning of this year, there was this idea

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<v Speaker 1>that if the US didn't act tariffs, you would end

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<v Speaker 1>up seeing the pain more greatly around the world, particularly

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<v Speaker 1>in Europe, maybe even in China. That has been shifted,

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<v Speaker 1>although now it seemed to be heading back to that

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<v Speaker 1>kind of idea. Where do you stand on this? Do

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<v Speaker 1>you think that the US is the apticenter of pain

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<v Speaker 1>or simply a part of a global trend that is

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<v Speaker 1>not going to leave really any Brice spots.

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<v Speaker 3>Yeah, I think it's interesting the point that you raise them. Certainly,

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<v Speaker 3>when we surveyed invest earlier this year asking them about

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<v Speaker 3>what they thought the impact of US policies would be,

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<v Speaker 3>it was very much a focus on being negative for

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<v Speaker 3>the rest of the world, particularly Europe and China as

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<v Speaker 3>people focused on the impact of tariffs, but would be

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<v Speaker 3>really quite positive for the US because people had in

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<v Speaker 3>mind the potential for tax cuts and for deregulation. And

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<v Speaker 3>while that potential still exists, what's happened, I think in

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<v Speaker 3>the US is that the focus has very much shifted

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<v Speaker 3>towards the impact of tariffs in the US, both in

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<v Speaker 3>terms of higher inflation and investment and growth uncertainty. So

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<v Speaker 3>it's really now become a sort of global issue engulfing

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<v Speaker 3>the world at this uncertainty and therefore raising the risks

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<v Speaker 3>of an economic shock that hits a profitability and profit margins.

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<v Speaker 3>More broadly and so well, we heard from.

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<v Speaker 1>The Turner secretary yesterday who talked about how the President

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<v Speaker 1>gave himself maximum negotiating leverage and now work Jameis and

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<v Speaker 1>Grill will be leading this negotiation starting with Japan. Does

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<v Speaker 1>that give you some sense of optimism? Can you put

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<v Speaker 1>this genie back in the bottle?

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<v Speaker 3>Well, look, anything is possible. We know that the tarifts

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<v Speaker 3>are about to be enacted, but of course there is

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<v Speaker 3>room I think for negotiation, and that's the signals that

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<v Speaker 3>have come out of the administration. But again, negotiations can

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<v Speaker 3>take a long time and can be quite complex, and

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<v Speaker 3>that's going to create an environment of uncertainty, at least

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<v Speaker 3>for a period of time. But also I think it

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<v Speaker 3>does demonstrate that we've we're in a change sort of

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<v Speaker 3>global environment in terms of the world trade architecture, and

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<v Speaker 3>this was already beginning to shift in the months that

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<v Speaker 3>followed the pandemic as companies around the world tried to

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<v Speaker 3>diversified supply chains. So we're in a less globalized environment.

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<v Speaker 3>That's going to put some down with pressure on world

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<v Speaker 3>trade and of course has implications both for inflation and growth.

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<v Speaker 3>But I think it is of course possible that this

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<v Speaker 3>is part of a tactic to negotiate and come to agreements,

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<v Speaker 3>but we've got some time yet of uncertainty. Bear in

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<v Speaker 3>mind also that we came into this year with relatively

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<v Speaker 3>high valuations in risk assets, both in equities and credit.

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<v Speaker 3>They were not pricing much downside risk at all. We're

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<v Speaker 3>still in the process of that adjustment coming through talking.

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<v Speaker 1>About valuations, and that's really where I wanted to end,

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<v Speaker 1>was this idea of large cap tech stocks that seemed

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<v Speaker 1>to lead the way, and there was sort of a

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<v Speaker 1>hint that maybe they could lead on the way up yesterday.

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<v Speaker 1>But some of the damage has been pretty impressive. I mean, Apple,

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<v Speaker 1>for example, has lost almost six hundred and forty billion

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<v Speaker 1>dollars of market capitalization since the end of the day

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<v Speaker 1>on April second. That's about nineteen percent of its value.

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<v Speaker 1>Do you see big cap tech leading again global stocks

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<v Speaker 1>given the fact that we are seemingly in a new

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<v Speaker 1>world order.

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<v Speaker 3>Yeah, I think it's an interesting point. When we came

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<v Speaker 3>into this year, our strategy was very much about diversification,

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<v Speaker 3>both geographically given the huge dominance that the US market

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<v Speaker 3>had sustained up until that point, but also a cross

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<v Speaker 3>sectors and factors, and we really emphasized the risk in

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<v Speaker 3>a sense that the US market had become so dominated

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<v Speaker 3>and concentrated in a small number of super large tech companies.

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<v Speaker 3>Of course, what we've seen since the beginning of this year,

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<v Speaker 3>aside from the slow down in growth expectations, is that

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<v Speaker 3>some of the big tech stocks have been hit as

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<v Speaker 3>you've seen new competition emerge, particularly from China. But to

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<v Speaker 3>be clear, these companies are very profitable and very strong

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<v Speaker 3>balance sheets. They're very cash generative and in that sense,

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<v Speaker 3>pretty defensive. And we've also done to work comparing the

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<v Speaker 3>technology ascent that we've seen in recent years to the

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<v Speaker 3>period of the tech bubble a quarter of a century ago,

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<v Speaker 3>and there are some major differences, particularly in terms of valuation.

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<v Speaker 3>These large companies are nowhere near the sort of bubble

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<v Speaker 3>type valuations that we saw a quarter of a century

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<v Speaker 3>ago around the Internet, or indeed in other bubble periods

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<v Speaker 3>in history, like Japan in the late nineteen eighties. So

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<v Speaker 3>I think that the tech sector is still going to

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<v Speaker 3>be a very important cornerstone of the recovery and ecty

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<v Speaker 3>markets as it comes through. And many of the biggest

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<v Speaker 3>companies are relatively defensive in terms of their balance sheets,

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<v Speaker 3>and that's an important factor I think to bear in mind.

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<v Speaker 2>I p good to get your thoughts this morning, Peter Ropenheimer,

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<v Speaker 2>that Anks, I've gone a sex Thank you, sir,