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Possible paths of evolution for the post-crisis world - Goldman Sachs

FXStreet (Łódź) - The Goldman Sachs team of analysts believe that there are three main scenarios regarding the future of the global economy in the post- crisis environment.

Key quotes

"Seven years after the start of the financial crisis, economic and financial conditions remain far from normal. In the ‘Wonderland’ of near-zero interest rates, many of the traditional relationships that have governed the way in which markets and cycles evolve have broken; the value of historical analysis has weakened."

"There are three main paths from here, in our view: a ‘secular stagnation’ scenario, a ‘sustained
moderation’ and a ‘normalisation’ based on a new global growth engine (driven by restructuring, the
US energy revolution and/or a major consumption shift in China). The first is broadly better for bondsthan equities, while the second is better for equities than bonds. ‘Normalisation’ would be very good for equities and negative for bonds."

"A stagnation scenario would keep bond yields lower for longer. Financials would likely underperform alongside domestically focused companies, particularly in Europe. In a moderation scenario, we would expect the scarcity of growth and income to drive returns. Growth stocks would likely re-rate further, while companies with reasonable yields and dividend growth prospects should perform well.‘Normalisation’ would be best for equities and benefit cyclicals and financials in particular."

"Markets seem to be pricing in a growing probability of stagnation, particularly in Europe. Conditions do not have to improve much to imply reasonable returns in equities. If, as we expect, growth expectations stabilise, the perception of a ‘risky’ asset might shift to fixed income given that risk premia are so low and yields have overshot fundamentals, in our view."

"We see sustained moderation as the most likely scenario for the global market, with moderate
stagnation in Europe. Equities should continue to outperform bonds, but with much lower absolute
returns than enjoyed since 2010. This global ‘moderation’ may continue for some years. It is likely to end as a result of either: (1) the bursting of a bond bubble as interest rates finally start to rise; or (2) significant further valuation expansion of equities (reducing long-term returns)."

"Despite the recent spike, the trend of volatility is likely to remain low given macro stability and
regulation – volatility tends to be affected by recent experience, but is also related to valuations. With low macro volatility, it is unlikely that market volatility will rise significantly and in a sustained way until valuations become stretched."

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