European shares ‘vote’ Goldman Sachs

Her Eleftherias Kourtali

Goldman Sachs sees value in European stocks after the recent pressures which led to a fall in their valuations. At the same time, he emphasizes that their discount against US shares remains large, while they are also very attractive in relation to the bonds.

As it points out in today’s report, with the market falling by 9.5% since the beginning of the year and the revisions of profits – at least overall – rising again this year, European stocks recorded another derating. The pan-European Euro STOXX 50 index trades with a p / e of 12.2x and the British FTSE 100 with just 10.9x.

“We continue to see value in European stocks, especially in relation to bonds, the gap between the dividend yield of European stocks and the real yield of the 10-year German bond is over 5%,” he said. In relation to nominal returns, the gap is slightly closed but still remains high relative to the long-term historical average, especially during periods of higher interest rates.In addition, payout ratios remain low, so dividend payments will be even more secure in a moderate economic recession.

Goldman Sachs points out that the discount on European stocks against US stocks remains significant, and European circular stocks have seen more aggressive sell-offs than their US counterparts.

The US Bank believes that the European market is forecasting a moderate economic downturn, with a few negative quarters over the next 12 months and PMIs falling to around 50. However, its economists expect that Europe (and even the UK) will avoid recession, but the probability is quite high given the impact of the war in Ukraine on energy prices and supply chains.

However, as GS notes, while PMIs are considered by economists as the best growth indicators, they have the problem that they do not predict how growth will move in 6 months from today, on which the market is focused.

Circular shares are currently trading at a 30% discount compared to the defense industry, and if the economic and business climate surveys are correct, then the discount could deepen further. In addition, if there is any cut in Russian gas supplies to Europe, the impact could be a significant recession across Europe, with Germany / Italy being most affected by their dependence on Russian gas.

Given the balance of risks, Goldman Sachs continues to have a mixed view of circular stocks, maintaining an underweight stance in the Chemicals, Construction and Materials and Consumer sectors, and a neutral stance in the Automotive and Industrial sectors.

Her favorite circular companies remain the Banks, in which she is overweight and believes that they will benefit from higher interest rates, while overweight remains in Energy and Raw Materials.