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Goldman: Buy Europe, Dump US
Aspire | 12 August 2015
By: Lim Si Jie
Articles (169) Profile

In the wake of recent bailout plans in Greece and rising valuation of US stocks, leading investment bank Goldman Sachs is recommending investors to reduce exposure to US stocks and put their money in other geographical regions that could offer a better return on investment, i.e. European equities.

Goldman, Bank of America: Europe vs US

According to a recent Global Opportunity Asset Locator report published by Goldman Sachs, analysts believe that “European equities have been one of the key asset classes to benefit from a fading of Greek risks following their drawdown”.

Goldman isn’t the only bank that is bullish in its outlook for European equities. Bank of America (BofA) Merrill Lynch Wealth Management’s recently published July Fund Manager Survey found growing sentiments to own European stocks, despite the recent Greek news flow. Intention to own European assets is high and rising, though global growth remains vitally important for European stocks.

US: Underweight

Goldman Sachs remains underweight on US equities as return potential is constrained by high valuations and margins. Historically, non-US equity markets have outperformed US equities in the 12 months after the first Fed rate hike. The Federal Reserve is widely expected to raise rates as soon as September – its first hike in nine years.

In comparison to European equities, Goldman expects the U.S. benchmark S&P 500 to return -0.7 percent, -0.2 percent and 3.2 percent, on a three-month, six-month and 12-month basis, respectively.

Europe: Overweight

Goldman Sachs upgraded its three-month view on European equities to “overweight”, while downgrading US stocks to “underweight in its most recent update. Goldman warned that US stocks “have historically underperformed in the 12 months after the Federal Reserve’s first rate hike”.

While performance potential might be limited in the near-term after the strong rebound, several supportive fundamental factors should help the European equities to outperform US equities until the year end of 2015. The survey found that a net 40 percent of fund managers were overweight on euro zone equities. Although it is a six-month low, it remained the most popular region, with increased intentions to gain regional exposure on a 12-month view.

A weaker euro, comparatively easy monetary policy and a pickup in Europe’s economic growth – which the bank expects will help drive stronger earnings and a recovery in margins, are strong factors for European Stocks to outperform US stocks.

Italy, Spain and Germany to Outperform

Within Europe, the bank is overweight on Italy’s FTSE MIB index, Spain’s IBEX 35 index, Germany’s DAX index and the U.K.’s mid-cap focused FTSE 250 index and underweight on Switzerland’s SMI index and the British blue-chip FTSE 100 index.

While Goldman Sachs did not include its individual forecasts for each index, it expects the pan-European STOXX Europe 600 to return 1.9 percent (three months), 5.1 percent (six months) and 12.9 percent (12 months) in local currency terms. The STOXX Europe 600 has already gotten a boost from abating Greece-related risks, rising 7 percent in the last two weeks.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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