Some explanations about the European stocks selloff after Brexit

Courtesy of Goldman Sachs who reviewed the performance of UK and European stocks after the Brexit vote… We focus specifically on European stocks although GS’s strategists recommend to be cautious on UK stocks even after the volatility in FTSE 100 & 250.

From GS’s note:

« European domestic names have underperformed, but this has largely been a function of the sell-off in banks. The performance of banks continues to move in lock-step with bond yields. Further asset purchases by the ECB and BoE are likely to keep yields low and we continue to favour our Stable growers basket. »

Source: Goldman Sachs

Source: Goldman Sachs

Add GS strategists:

« The rise in support for anti-EU parties across Europe and the political risk of a less cohesive Euro area contributed to a flight to quality towards core Euro-area sovereign bonds. Combined with markets’ expectations of additional support from the ECB, bond yields have fallen across the board in Europe, putting additional pressure on banks’ margins. »

My conclusion right now: the trend is not your friend. As long as govies yields will be under pressure, banks will also be under pressure which will spillover to the overall European equity market.

Unless global investors at some point feel more comfortable about the global economic cycle and don’t see a major event (US recession/China hard landing) occur, they probably stay away from European equities in the near term. And from a strict valuation stand point, due to the political uncertainties right now, European equities probably don’t offer a wide enough margin of safety to justify getting exposure.

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