Goldman Strategists See End of Europe’s Stock Woes in ECB Pivot

Investors should learn to stop worrying and start loving the European Central Bank’s hawkish pivot, according to Goldman Sachs Group Inc. strategists.

“The dramatic shift in rates, especially in Europe, is a sign that the problems that plagued Europe in the last cycle — low nominal GDP growth, disinflation, no earnings — are finally diminishing,” strategists including Sharon Bell and Peter Oppenheimer wrote in a note on Tuesday.

When it comes to stock markets, “some of the biggest reasons for Europe’s longer-term underperformance have started to turn,” they said.

Last week’s abrupt change of tone by ECB president Christine Lagarde caught investors off guard, triggering a sell off in European bonds and exacerbating declines for equities that were prompted by fears of Federal Reserve tightening. Fund managers and strategists are split on whether the rally that catapulted stocks to successive records can continue as major central banks turn off the liquidity taps.

Goldman’s team is sanguine about the impact of rising yields on the sustainability of public finances in highly indebted countries, such as Italy, saying that higher borrowing costs will be offset by an expanding economy.

Bond Pain in Europe’s Periphery Shows Risks of Ending Stimulus

“We continue to expect strong growth in Europe, including in Italy and Spain, which we think will ultimately contain spreads near current levels as we approach lift-off,” the strategists wrote, adding that Italian stocks are already trading at a discount and won’t underperform as a result of the ECB’s pivot.

For Goldman’s team, higher rates also mean investors should stay overweight in attractively valued stocks such as European banks. While less stimulus could slow down growth and hurt lenders, such risk is not imminent, the strategists wrote.

Low Valuations Favor Europe in These Testing Times: Taking Stock

“Value sectors, which were once low growth and very low return are also starting to see fundamental return improvements, most notably energy and telecoms,” according to Goldman’s note. On the flip side, higher rates may spell trouble for pricey growth stocks focused on technology, digital economy and renewables, as well as firms with weak balance sheets, they say.