- Both upside and downside surprises to inflation drive up the ERP "Historically, surprises to inflation have been associated with a high equity risk premium being priced by the market. This is true for both upside and downside surprises. Recent history suggests that risk aversion may be more sensitive to downside surprises in inflation when the level of inflation
and rates are themselves low."
- We analyze theoretical implications of deflation on sectors & styles "In a deflationary scenario we believe defensives would outperform cyclicals. Strong balance sheets would outperform weak balance sheets. Companies with large pension obligations, financials and companies with wage intensive cost structures would all underperform the market. Sectors used to deflation, such as technology, and companies exposed to areas of the world without deflation, would outperform."
- …and confirm that the conclusions held up in the case of Japan "In Japan, export oriented sectors outperformed domestically exposed sectors for more than 20 years. Financials underperformed the market, as did sectors with weak balance sheets."
- The aftermath of financial crises: Binary outcomes "We analyze the aftermath of financial crises in Sweden, Finland and Japan. The outcomes are binary. In the case of Sweden and Finland, earnings growth and ROE rebounded quickly, whereas they remained depressed in Japan. The outcome in terms of market prices was dramatically better in
Sweden and Finland. So far, the outcome in Europe looks more like the Swedish and Finnish cases. This supports our positive view on earnings and our 12-month price target of 300 for the Stoxx Europe 600."
and rates are themselves low."
- We analyze theoretical implications of deflation on sectors & styles "In a deflationary scenario we believe defensives would outperform cyclicals. Strong balance sheets would outperform weak balance sheets. Companies with large pension obligations, financials and companies with wage intensive cost structures would all underperform the market. Sectors used to deflation, such as technology, and companies exposed to areas of the world without deflation, would outperform."
- …and confirm that the conclusions held up in the case of Japan "In Japan, export oriented sectors outperformed domestically exposed sectors for more than 20 years. Financials underperformed the market, as did sectors with weak balance sheets."
- The aftermath of financial crises: Binary outcomes "We analyze the aftermath of financial crises in Sweden, Finland and Japan. The outcomes are binary. In the case of Sweden and Finland, earnings growth and ROE rebounded quickly, whereas they remained depressed in Japan. The outcome in terms of market prices was dramatically better in
Sweden and Finland. So far, the outcome in Europe looks more like the Swedish and Finnish cases. This supports our positive view on earnings and our 12-month price target of 300 for the Stoxx Europe 600."
GoldmanSachs Europe Portfolio Strategy 20100729
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