Goldman Sachs predicts stock market bottom for Europe; says how to position
Goldman Sachs has forecast further near-term pain for a number of European indices, with one expected to be firmly in a bear market by the end of the year. The Euro Stoxx 600 is set to fall nearly 8% by the end of this year, the investment bank said in a client report on Monday. On Tuesday, the index traded around 392, up about 0.8% on the day, but remains down about 7% over the past month. If it dropped to 360, as Goldman expected, it would be more than 25% lower than its recent peak earlier this year. Goldman forecast that the index of large pan-European companies should return to current levels over the next six months, but rise to 410 within a year — a 9% rise, including dividends. The Wall Street Bank also lowered its price target for the FTSE 100 to 6600 and the Euro Stoxx 50 to 3100 for the next three months. That’s down 6% and 7.4%, respectively, from current levels. “We were bearish against equities, arguing that this bear market is not over yet,” the analysts said. What is driving the downgrades? Goldman said its forecast for a 2023 recession in Europe had “deepened.” It now expects euro zone economies to contract by 0.4% next year, worse than previously expected. UK GDP is also likely to fall by 0.3% next year, according to the bank. The research note said interest rate hikes by the European Central Bank and Bank of England, coupled with rising energy costs due to lower gas flow from Russia, will result in a “moderate” recession in the coming months. Although natural gas prices have fallen from their late August peak, they remain higher by at least 10 times their long-term average. Goldman also said that while healthy household finances, a strong labor market and subsidized energy prices will “mitigate” the impact of rising interest rates, they will not be enough to fully mitigate it. How to position Goldman Sachs is particularly bearish when it comes to earnings forecasts for European companies. A survey by FactSet shows that analysts expect earnings per share to grow by 3% in Europe in 2023. In contrast, Goldman expects EPS to fall 10% next year. A number of other market participants are also turning their profit expectations into negative. “As growth slows and costs continue to rise, we expect margins to decline,” the analysts said. The Wall Street giant predicted that retailers would be hit hardest due to their reliance on consumer income for profits. The construction and chemical sectors are also vulnerable due to their high energy prices, she added. The bank is underweight in all three sectors. He is overweight (OW) in “some defensive” sectors, including healthcare & telecoms, and banks & energy. “We prefer a barbell approach with some quality areas, for example our High & Stable Margins basket…where EPS is likely to remain resilient, some defensive stocks (OW Healthcare, Telecom, Defense…) and some value areas which we believe after being particularly undervalued,” the analysts wrote. Since February, Goldman Sachs said fund managers were selling European stocks every week. It warned, however, that while the selling hasn’t been big yet, a comparison to previous downturns showed there was more to come becomes.