European equities remain good value despite near-term risks, such as Italy’s political deadlock and sluggish economic growth, Goldman Sachs’ equity strategists write in a research note.
The Goldman team adds that investors looking for the best growth opportunities should focus on the technology, household goods, healthcare and automobile sectors, and avoid the telecoms and energy sectors.
It also backs insurance stocks over banking stocks in the financial sector.
Goldman upgrades the healthcare and technology sectors to “overweight” from “neutral”, highlighting healthcare stocks such as Novo Nordisk, Roche and Shire among its top picks, and singles out Aveva, CapGemini, Ericsson and SAP as its top technology stocks.
Goldman also raises its stance on the personal care and household goods sector to “overweight” from “neutral”, favouring stocks such as British American Tobacco, L‘Oreal and Richemont while maintaining an “overweight” rating on the insurance sector.
Goldman takes “underweight” positions on the European telecoms, oil and gas and retail sectors, highlighting UK retailer Sainsbury as a “sell”.
“We continue to avoid domestic European consumer exposure given high unemployment, weakness in wage growth, declining real disposal income and fiscal austerity in most of Europe,” writes Goldman.
Goldman says that, although there is good value in European stock markets, investors should expect short-term volatility, arguing that the main impact of a pledge last year by European Central Bank head Mario Draghi to protect the euro currency has already been factored in by investors.
“We expect a modest recovery in global growth this year accelerating into 2014. European equities in our view remain good value, especially versus bonds,” writes Goldman.
“But we are also cognisant that while a fall in the risk premium is likely to be a longer term trend, there might be short-term volatility. First, the risk premium has already fallen substantially post Draghi’s comments in the summer in support of peripheral sovereign debt. This limits room for further falls in the near term,” it adds.
“Second, growth remains weak in Europe and it remains unbalanced with the peripheral euro area still in deep recession and likely to continue to suffer from political risk because of this.”
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