Notes from GS

Notes from GS

April 9, 2020

Outlook ESG
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In the latest The Daily Check-In, Kara Mangone, Chief Operating Officer of Goldman Sachs’ Sustainable Finance Group, discusses how the global pandemic is impacting the way corporates and investors approach ESG.

The latest from GS Research

European Daily: The Parameters of the Deep Downturn (Dacic)

We expect a sharp contraction in European growth as a result of the coronacrisis, with Euro area growth of -9% in 2020. But the uncertainty around our forecasts is very high given the unusual type and magnitude of the disruption. Our forecast depends importantly on three parameters: the peak hit to activity, the duration of the strict containment measures, and the speed of the subsequent rebound. We estimate that in an upside scenario, where the peak activity declines are smaller and the rebound is faster than we expect, the 2020 growth hit could diminish to -6%. But in a severe downside scenario with larger peak losses, a longer lockdown, and a slower rebound than in our baseline, growth could be as low as -16% in 2020. Taken together, we therefore think the risks to our European growth forecasts are still skewed to the downside.

Strategy Espresso: What is the ‘real’ valuation?

What is the ‘real’ valuation? We are asked this question a lot given that there is so much uncertainty about earnings. The P/E on European equities based on 12-month forward consensus EPS is 12.6x; it was just 10.3x a few weeks ago at the low in mid-March. However, if we think that the bottom-up consensus is too high, then this is pretty meaningless. Equally, the dividend yield, at 5.0% trailing at the low, was one of the highest ever. But if companies are cutting dividends (and more so in this case than in previous cycles given restrictions from regulators and governments), then how can we have confidence in this figure?

Europe Banks – The Big Question of Dividends: how permanent is supervisory intervention?

Supervisors called for dividend cancellations in 2020, and banks obliged. Retaining 2019 dividends amounts to €50bn; this amount now grows capital and increases the ability of banks to accommodate corporate loan demand or absorb losses. Notably, policy operates on aggregates, though within the bank aggregate, enormous differences exist. As a result, in practice these dividend suspensions meaningfully affect only one segment of banks – the strongest. Overall in 2020/21, we see very limited dividends; the former due to supervisory action and the latter due to reduced profitability. We do, however, see dividends recovering in 2022, and a normalisation in 2023.

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