Goldman strategists see end to European stocks woes in ECB pivot

(Bloomberg) —

Investors should learn to stop worrying and start loving the European Central Bank’s hawkish kingpin, according to strategists at Goldman Sachs Group Inc.

“The dramatic change in rates, especially in Europe, is a sign that the problems that have plagued Europe over the past cycle – weak nominal GDP growth, disinflation, lack of profits – are finally easing,” strategists wrote. such as Sharon Bell and Peter Oppenheimer. in a note on Tuesday.

Turning to equity markets, “some of the main reasons for Europe’s long-term underperformance have started to turn,” they said.

ECB President Christine Lagarde’s abrupt change of tone last week caught investors off guard, triggering a sell-off in European bonds and exacerbating equity declines sparked by fears of Federal Reserve tightening. . Fund managers and strategists are divided on whether the rally that has propelled stocks to successive highs can continue as major central banks close liquidity taps.

Goldman team optimistic about impact of higher yields on sustainability of public finances in highly indebted countries, such as Italy, saying higher borrowing costs will be offset by a growing economy .

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“We continue to expect strong growth in Europe, including Italy and Spain, which we believe will eventually contain gaps close to current levels as liftoff approaches,” the strategists wrote, adding that Italian stocks are already trading at a discount and have gained. ‘t underperform due to the ECB pivot.

For the Goldman team, higher rates also mean that investors should remain overweight in stocks with attractive valuations such as European banks. While less stimulus could slow growth and hurt lenders, such a risk is not imminent, the strategists wrote.

Low valuations favor Europe in difficult times: assessment

“Value sectors that were once low-growth and very low-return are also starting to see fundamental performance improvements, including energy and telecommunications,” according to Goldman’s note. On the other hand, higher rates could cause problems for expensive growth stocks focused on technology, the digital economy and renewable energy, as well as companies with weak balance sheets, they say.

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