Goldman Sachs has backed the UK FTSE 100 and Germany’s DAX to outperform European stocks in a resurgent year.
European markets got off to a solid start in 2021 with the rollout of Covid-19 vaccines, a Brexit deal, and democratic control of all three branches of the U.S. government, giving investors hope for a robust economic recovery.
The pan-European Stoxx 600 is up around 2.4% since Tuesday afternoon, despite containment measures being put in place in a variety of key economies, particularly a strict nationwide lockdown in England.
Given the sluggish start to vaccine rollout and the likelihood that the new strain of virus will penetrate the euro area and containment measures will be tightened into February, Goldman economists are forecasting a -0.1% decline in the euro area in 2021 with a decline of 0.1% in the first quarter sharper “double-dip recession” of -1.5% in the UK
The combination of that and adapting to new trade barriers following the UK’s formal exit from the EU on Jan. 1 makes the near-term economic outlook negative, but Sharon Bell, Senior European Equity Strategist at Goldman Sachs, told CNBC on Tuesday against the UK’s FTSE 100 The index was a “very different beast” with around 80% of FTSE 100 sales outside the UK
Globally, Goldman expects annual GDP (gross domestic product) expansion of around 6.5%, which is above consensus, and Bell said FTSE 100 companies with their significant international exposure will benefit from this.
“The second reason for us and the international engagement is just that this has become a very value-oriented index. It is relatively cheap compared to the S&P 500, for example, even compared to the European markets where it has a large part of its industry exposure That has been very unloved like financials and commodities in the past few years, and we believe these could come back, “she told CNBC’s Street Signs Europe.
Goldman also recommends investors to leverage the German DAX for similar reasons, as like the FTSE 100 it has underperformed in recent years and is similarly geared towards the health of global growth.
“The DAX is also quite cheap compared to the rest of Europe, not quite as cheap as the FTSE 100 in Great Britain, but the DAX also offers a modest discount compared to the rest of Europe,” she said.
“It’s a function of those two things: we see them as indices of value, and we also see them as very much geared towards stimulating the global economy.”
Vaccination and stimulus hopes
In a research note on Sunday, Sven Jari Stehn, chief economist at Goldman Sachs in Europe, highlighted a number of questions that could determine the course of the recovery in Europe, particularly whether spending pent-up after a volatile first quarter from the surge in vaccinations Services in the EU will be unlocked spring.
The European Union has received an additional 300 million doses of the Pfizer and BioNTech vaccine. Moderna’s option has now been approved in the UK. Goldman estimates that 50% of the population will receive their first dose of vaccine by April and June in the UK and the euro area, respectively.
This will allow for a gradual reopening of economies from March and a sharp spike in activity in the second quarter, the bank predicts.
“In view of the renewed weakness in winter, we estimate that real GDP (gross domestic product) in the euro area will be 5.5% below the level before Covid by the end of the first quarter and between –4.8% in Germany and –8.9 % is in Spain, “wrote Stehn.
“In view of this pent-up demand – mainly in the service sector – and the experience of the third quarter of last year, we are sticking to our forecast that real GDP growth in Europe will increase sharply in the second quarter, to + 2.7% for the euro area and + 5% in the UK “
Much of the rebound in global equity markets since the March 2020 crash has been driven by unprecedented fiscal and monetary stimulus from governments and central banks, and Goldman expects fiscal policies to remain highly accommodative through 2021.
Stehn suggested that a vaccine-induced upswing in services, expansive fiscal policies, and a “supportive global environment” with improved US projections following Democratic victories in the Georgia Senate runoff will make global growth the consensus forecast for this one Year exceeds.
Goldman forecasts real euro area GDP growth of 5.2% in 2021 and 4% in 2022, both well above consensus, with the bloc’s economy returning to pre-crisis levels by the end of this year.
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