Goldman Sachs strategists on Thursday reaffirmed their positive outlook on the European stock market, citing expectations of solid growth and monetary policy easing into the second half of 2024.
Despite the year-to-date rally in equities, which might indicate some optimism is already priced in, strategists highlighted that market correlation is at a five-year low, which could present alpha opportunities in the region.
To be more specific, Goldman’s team advocates for a barbell approach, favoring both "Deep Value" and "Defensive Growth" stocks. It highlighted inexpensive stocks like JD (NASDAQ:JD).com, IAG, ISS, and E.ON, all of which they believe carry upside potential versus consensus.
Moreover, strategists pointed to stocks such as Deutsche Bank, Iveco, and Imperial Brands (OTC:IMBBY), trading at a discount to U.S. peers but offering higher earnings per share (EPS) growth.
On the growth side, the Goldman Sachs team is looking for stocks with strong revenue prospects and reasonable valuations, highlighting Adyen (AS:ADYEN), Rheinmetall, ASML (AS:ASML), and Flutter Entertainment as examples.
The investment bank said it has also introduced a new screening for companies with underappreciated operating leverage, including Vestas Wind Systems, Delivery Hero, Rolls-Royce (OTC:RYCEY), and Novonesis.
“Lower rates should also create a friendlier environment for increased investments, but we favour names where those higher investments are accompanied by improving return on capital (CCH, Straumann, Smiths),” strategists wrote.
“Analysts also see a favourable setup for higher cash returns to shareholders,” they added, pointing to stocks like BNP Paribas (OTC:BNPQY), ASR Nederland, and Repsol (OTC:REPYY) for attractive yields and dividend growth.
In addition, Goldman remains positive on names like Ferrovial, Derwent London, and IMI (LON:IMI), where dividend potential is supported by free cash flow growth, as well as companies with declining capital expenditures (capex) after a period of increased investment, which could lead to improved free cash flow generation. Such examples include Orsted (CSE:ORSTED), Nexi (BIT:NEXII), and the London Stock Exchange Group (LON:LSEG), Goldman said.
“In the near-term, strategists acknowledge scope for higher equity volatility, given the recent rally and until inflation momentum turns decisively more negative,” strategists noted.
“For investors looking to position somewhat defensively, we screen for names offering higher relative risk-adjusted upside (Air Liquide (OTC:AIQUY), BVI, DHL, Volvo (OTC:VLVLY)),” they continued.
Lastly, for those positioning for a capital markets recovery, strategists featured a basket of European M&A candidates identified by the ticker GSTRACQN, and companies with a high internal rate of return on a standardized leveraged buyout model.