Goldman Sachs says Europe's stocks have a huge 'cushion' not seen since the financial crisis

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Neil Hall/Reuters

  • While equity markets globally will probably gain in 2020, Goldman Sachs makes a case for European stocks especially.
  • For Europe and the US, "the cash yield" - the dividend yield plus the buyback yield - in European equities is far above the yield on risk-free bonds.
  • Goldman says it's "higher now than at any time since the financial crisis."
  • That gives the region's stocks a "substantial yield cushion."
  • Also, investors are "likely to become increasingly focused on US election risk, and less on risks in Europe," Goldman wrote.
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"For much of the past decade the US has significantly outperformed other equity markets, and for good reason," Peter Oppenheimer, chief global equity strategist and head of macro research in Europe at Goldman Sachs, wrote in a note on Monday.

One of those reasons is the 2019 boom in valuations, which he says has been driven by central-bank easing.

"While profits typically tend to rebound sharply in the year following a strong valuation expansion, this is not our expectation for this year and next," he wrote. "So long as the economic cycle continues to expand - and we expect it to - profits are likely to grow and equities should make some progress on balance through 2020 as a whole."

Looking at equity regions more closely:

"The US equity market has managed to grow its EPS close to 90% since its pre-crisis peak, compared with just 17% in Asia, 12% in Japan and a paltry 4% in Europe," Goldman wrote. "Europe's profit weakness partly reflects its value-dominated sector composition."

When Goldman adjusted Europe's benchmark index to mimic the sector weightings of the S&P 500, "it would have seen around a 50% growth in EPS." And buybacks in the US also explain a big chunk of this EPS growth gap.

Screenshot 2020 01 13 at 10.52.11

Goldman Sachs

"Over the next couple of years this gap is likely to narrow, suggesting less obvious triggers for US outperformance," the bank wrote. So while "we do not see very compelling reasons to expect other equity markets to outperform significantly," Oppenheimer wrote, investors are "likely to become increasingly focused on US election risk, and less on risks in Europe and Asia," making "a good argument for more geographic diversification."

For Europe and the US, "the cash yield (shown here as the dividend yield plus the buyback yield) in equities remains far above the yield on risk-free bonds," Goldman wrote. "In Europe's case, this gap is higher now than at any time since the financial crisis."

That gives the region's stocks a "substantial yield cushion."

Screenshot 2020 01 13 at 12.08.35

Goldman Sachs

And, Goldman notes, "almost 100%" of European companies have a dividend yield greater than their corporate bond yield. Looks at the comparison between the European benchmark and the US S&P 500 in ther chart below.

Screenshot 2020 01 13 at 12.04.01

Goldman Sachs

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