European Stocks May Drop 10% in Next Three Months, Goldman Says
Jan. 13 (Bloomberg) -- European stocks may drop as much as 10 percent amid concern the region's sovereign-debt crisis will harm the economy, before recovering in the second half of 2012, according to Goldman Sachs Group Inc.
The Stoxx Europe 600 Index might decline to 225 in the next three months, Gerald Moser, Goldman Sachs's London-based equity strategist, said at the bank's Global Strategy conference in Zurich today. He expects the gauge to recover in the second half of the year to close at 250 to 270, a gain of as much as 20 percent from the trough. The index fell 0.6 percent to 247.97 at 3:09 p.m. in London today.
"It will be a difficult year to navigate," Moser said. "Investors are worried as there is a lot of uncertainty regarding the short-term outcome of the crisis, but we would expect equities to move higher on some resolution and a narrowing of spreads on a sustainable basis."
The Stoxx 600 has advanced 2.5 percent since the beginning of this year as economic reports around the world exceeded forecasts and falling bond yields in the euro area eased concern that the debt crisis is spreading.
"Some resolution, likely driven by an agreement between France and Germany on how to socialize the debt burden, is likely in the next couple of months," Moser said.
Goldman Sachs forecast a 10 percent drop in European profits in 2012, excluding financial companies. Moser said he wouldn't be surprised to see analysts' earnings projections cut by as much as 30 percent.
Valuation Discount
The Stoxx 600 trades at 10 times estimated profits, a discount of 16 percent to its average price-earnings ratio of 11.9 in the past five years, according to data compiled by Bloomberg.
"Equities are an attractive asset class versus bonds," Moser said. "Although the markets are fairly cheap, valuation is not everything. We'll first have to see better clarity and less uncertainty for the market to change direction."
Moser recommended buying shares of European companies that rely on emerging markets for revenue rather than those mainly exposed to the domestic economy, which will "face difficult times in Europe."
"It isn't so much European growth that matters, but overall global growth," he said. "Companies with a global reach are going to be able to generate growth in the next years."
For 2012, Goldman Sachs has an "overweight" rating on the health-care, oil and gas and telecommunications industries, citing strong dividends and cash flows that may provide a "nice cushion if the market falls."
On the other hand, Moser said he is "underweight" in financial shares as well as the food and beverage industry as they have "structural issues and are extremely expensive."
To contact the reporter on this story: Corinne Gretler in Zurich at cgretler1@bloomberg.net
To contact the editor responsible for this story: Andrew Rummer at arummer@bloomberg.net
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