Goldman Goes Euro: Time to Buy European Equities

On July 20th, Goldman Sachs recently upgraded its three-month view on European equities to “overweight” status. The bank also downgraded U.S. stocks “underweight” because of historic underperformance after the Federal Reserve’s first rate hike. Investors now need to decide whether they will follow that advice and buy into European equities while minimizing exposure to U.S. stocks. This news comes on the heels of Greece’s progress with its creditors.

On its Global Opportunity Asset Locator report, Goldman Sachs wrote, “European equities have been one of the key asset classes to benefit from a fading of Greek risks following their drawdown…While performance potential might be limited in the near-term after the strong rebound, several supportive fundamental factors should help outperformance of European versus U.S. equities until year-end.”

These “supportive fundamental factors” include a weaker euro, moderately easy monetary policy, and an uptick in Europe’s economic growth that will likely drive stronger earning and recovery. Italy’s FTSE MIB index, Spain’s IBEX 35 index, Germany’s DAX index are all reportedly overweight. Meanwhile, the U.K.’s mid-cap focused FTSE 250 index, the British blue-chip FTSE 100 index, and Switzerland’s SMI index are all underweight. Goldman Sachs did not include individual forecasts for each index, but it expects, “the pan-European STOXX Europe 600 to return to 1.9 percent, 5.1 percent, and 12.9 percent on a three-month, six-month, and 12-month basis respectively.” The waning Greece risks have already given the STOXX Europe 600 a boost, with a 7 percent bump in the last two weeks.

Bank of America Merrill Lynch’s July Fund Manager Survey also indicate overweight European stock. It reported that, “Despite the Greek news flow, intention to own European assets is high and rising, though global growth remains vitally important for European stocks.” European equities are set to become increasingly popular with high intentions to gain regional exposure in the next year.

Making the decision to go European more tempting is the analysis of U.S. stocks. Goldman, “sees the U.S. benchmark S&P 500 returning native -0.7 percent, negative -0.2 percent, and a positive -3.2 percent on a three-month, six-month, and 12-month basis respectively.” The bank warns that U.S. equities’ potential is constrained by “high valuations and margins.”

If you are seriously considering new investment opportunities, let an advisor walk you through the European equities options versus your U.S. stock options. Minimizing risk is crucial to protecting your family’s wealth, and a priority for our advisors.