Capital Markets: Observations and Insights Autumn 2019

Cheaper Than You Think? ​ Lending vs. Owning

LENDING vs. OWNING

• Calculating investors’ required rate of return above the prevailing risk-free interest rate is a good way of measuring the attractiveness of stocks relative to Treasury bonds ‒ Using the so-called Equity Risk Premium shows global stocks are about as cheap as they have been in the past couple of decades

High Equity Risk Premiums Show Stocks Are Cheap

US World

0% 1% 2% 3% 4% 5% 6% 7% 8% 9%

Cheaper

More Expensive

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Estimated Equity Risk Premium

Source: Goldman Sachs. Note: The market implied equity risk premium (ERP) is the rate that at each point in time makes the theoretical value from GS Dividend Discount Model equal to the observed market price. U.S. equities are represented by the S&P 500. World equities are represented by a weighted average of MSCI Asia Pac ex-Japan (20%), TOPIX (10%), Stoxx 600 (30%), and S&P 500 (40%).

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