The current economic environment is set to drive European earnings higher in 2017 making equities in the region more attractive than their U.S. counterparts, strategists at Goldman Sachs told CNBC on Monday.
“We think there’s a great combination of policy, there’s growth, Europe is very open and the stocks in the (Euro Stoxx 50 benchmark) are representative of global growth more than in the U.S.,” Francesco Garzarelli, co-head of global macro and markets research at Goldman Sachs, told CNBC on Monday at the bank’s global strategy conference in London.
He added that expectations of a further weakening of the euro zone’s single currency would also be supportive of European earnings. “We have the currency down, so the mix seems to us between real growth, better global growth, low inflation, easy (monetary) policy,” Garzarelli added.
Despite a heavy political calendar in Europe and expectations of rising support for populist parties across the region, Goldman Sachs seems confident that there are opportunities arising amid such an environment.
“There’s a bunch of risk premium on the Italian banking sector,” Garzarelli said. Furthermore, a potential right-wing president in France could lead to a stronger reform agenda in Europe, he added.
“If France were to change gear and become more inclined to move forward into reforming its economy I think that will force the likes of Italy, Portugal, Greece to do the same,” Garzarelli said, mentioning that such political attitude would be a “positive development” for returns.
Many economists and investors have highlighted the raft of elections in Europe as their main concern for 2017. However, Credit Suisse said in a note on Monday that political risks were “overstated.”
“First of all, we think it unlikely that the Dutch, French, German or (possible) Italian elections will deliver more extreme, populist governments,” Credit Suisse analysts said in the note.
“And secondly, the euro area economy proved resilient to political (and other) shocks in the last couple of years and should remain so,” the bank added.
Supporting the outlook for European earnings is also the expectation that there will not be further capital requirements for the financial sector in the region.
“There’s confidence that there’s not going to be further tightening or further tougher capital requirements for the banking system and I think that for Europe that’s important,” Peter Oppenheimer, chief global equity strategist at Goldman Sachs, told CNBC on Monday.
Meanwhile on Monday, Deutsche Bank raised its forecast for the pan-European Stoxx 600 from 6 percent to 9 percent for the year. On Friday, Bank of America said return on equity is forecast to go up by 11 percent in 2017.
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