Goldman Channeling Oliver Twist Asks for More of European Stocks

(Bloomberg) -- An earnings recovery that has begun in Europe after years of stagnation will continue in 2018, according to Goldman Sachs Group Inc.

In a note titled “Can we have some more please?” the bank’s equity strategists doubled their forecast for next year’s profit growth in the region to 10 percent. They expect a total return of 12 percent from the Stoxx Europe 600 Index in the next 12 months, and similar gains for the Euro Stoxx 50 Index and the U.K.’s FTSE 100 Index.

European equities have underperformed peers in the U.S. and Asia this year, despite delivering on a long-awaited earnings rebound. Strategists are now pinning their hopes on 2018, with Citigroup Inc. more bullish than Goldman -- predicting that improving profits and economic growth will lift the Stoxx 600 by another 20 percent through 2018.

“There is room both to grow top-line and see margins expand on the back of good global growth,” Goldman equity strategists Sharon Bell, Peter Oppenheimer and Lilia Peytavin wrote in a note Monday.

Stocks offering “deep value” -- trading cheaper than the benchmark -- may start to deliver next year, says the lender, noting its overweight position on automakers, utilities and oil-and-gas shares. Goldman also favors growth sectors such as technology companies and “late-cycle long commodity exposure,” upgrading basic-resource shares to overweight from underweight. It recommends being long financials versus consumer staples to benefit from rising rates.

Region-wise, a tactical long position on Spain’s IBEX 35 Index versus the FTSE MIB Index is among the bank’s recommendations. The Spanish gauge has risen only half as much as its Italian peer in 2017 amid Catalonian woes.

Profits, rather than valuations, have driven European shares higher this year, according to Goldman Sachs. While the Stoxx 600 has climbed 7.4 percent in the period, its price on a 12-month projected earnings basis has risen at only a third of the pace. The bank estimates profit growth of 15 percent in 2017, the strongest pace in six years.

--With assistance from Sofia Horta e Costa

To contact the reporter on this story: Namitha Jagadeesh in London at njagadeesh@bloomberg.net.

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, Paul Jarvis, Brian Lysaght

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