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Nov. 11, 2021, 10:34 a.m. EST

Goldman expects the bull market for ‘still-cheap’ Europe stocks to carry on in 2022

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By Barbara Kollmeyer

Even after record returns this year, European stocks look cheaper than they did at the start of 2021, says Goldman Sachs, which recommends investors keep a solid foot in the region for 2022.

“With a forward P/E [price earnings ratio] of 16 times and a dividend yield of 3%, it represents good value versus the U.S. and excellent value versus other assets,” said a team of strategists at the bank led by Sharon Bell, in a note to clients on Thursday. Low interest rates and an upbeat recovery view add to the cheap valuation package, she said.

The European Commission on Thursday lifted its growth forecast for the eurozone area, but lowered its outlook for next year, citing sharp rises in energy prices that would cut into consumer spending. 

The bank expects the Stoxx Europe 600 /zigman2/quotes/210599654/delayed XX:SXXP +1.42% to return 13% for next year, with a price target of 530. That’s a 20% gain from current levels, but a more moderate return versus the 21% gain seen year-to-date for the index in 2021.

And the region hasn’t been shy of shoppers, with buying from equity mutual funds, multi-asset balanced funds, private equity bids, mergers and acquisitions and even companies scooping up shares with growing cash piles, said Bell and the team.

The bank sees earnings per share growth of more than 60% in 2021, 6% in 2022 and 4% in 2023 for the index. Thus far, earnings have proven resilient to supply chain issue and higher input costs, with margins also peaking, though not seen declining.

Among other reasons to expect better earnings growth from Europe in the next cycle are higher commodity prices, modestly higher bond yields that will boost bank returns and more infrastructure spending, especially on so-called green capital expenditure, which will add to top-line growth, though also costs, said Goldman. The bank also noted that Europe’s share of more stable and higher-growth companies has increased.

The below chart lays out Goldman’s sector preference, with industrials, for example, lifted to overweight, given exposure to strong investment demand from the Green CAPEX build-out, fiscal spending and inventory rebuild. Consumer products and services, including most luxury names, were cut to underweight.

As for Thursday’s action, the Stoxx 600 index rose 0.2% to 484.81. Of the major regional indexes, the German DAX /zigman2/quotes/210597999/delayed DX:DAX +1.62% gained 0.1%, the French CAC 40 /zigman2/quotes/210597958/delayed FR:PX1 +1.64% increased 0.1% and the U.K. FTSE 100 /zigman2/quotes/210598409/delayed UK:UKX +0.27% increased 0.5%.

Shares of Delivery Hero /zigman2/quotes/208380525/delayed XE:DHER +2.96% rose 2% after the German food-delivery company said revenue and orders for the third quarter jumped, and lifted its 2021 revenue guidance.

Siemens /zigman2/quotes/205905025/delayed XE:SIE +2.82% shares rose 2% after the German industrial company posted a rise in growth and revenue, lifted by growth in its key industrial business. The company also proposed a dividend increase.

On the downside, shares Burberry /zigman2/quotes/205386705/delayed UK:BRBY +1.80% fell 6% after the luxury goods group reported disappointing second-quarter same-store sales, and slowing in its key China market. The company reinstated its interim dividend and rebooted share buybacks.

Shares of Johnson Matthey /zigman2/quotes/207054035/delayed UK:JMAT -6.75% tumbled nearly 20%, the day’s worst performer after the chemical group warned on profits and said its chief executive was leaving.

+6.22 +1.42%
Volume: 0.00
May 27, 2022 11:03p
DX : Xetra Indices
+230.90 +1.62%
Volume: 71,341
May 27, 2022 6:30p
FR : France: Euronext Paris
+105.17 +1.64%
Volume: 70,892
May 27, 2022 6:05p
+20.54 +0.27%
Volume: 579,898
May 27, 2022 4:57p
XE : Germany: Xetra
+0.98 +2.96%
Volume: 1.84M
May 27, 2022 6:30p
P/E Ratio
Dividend Yield
Market Cap
€8.57 billion
Rev. per Employee
XE : Germany: Xetra
+3.34 +2.82%
Volume: 2.01M
May 27, 2022 6:30p
P/E Ratio
Dividend Yield
Market Cap
€97.78 billion
Rev. per Employee
UK : U.K.: London
1,670.50 p
+29.50 +1.80%
Volume: 1.05M
May 27, 2022 4:35p
P/E Ratio
Dividend Yield
Market Cap
£6.63 billion
Rev. per Employee
UK : U.K.: London
2,113.00 p
-153.00 -6.75%
Volume: 685,349
May 27, 2022 4:35p
P/E Ratio
Dividend Yield
Market Cap
£3.86 billion
Rev. per Employee

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