« Reflation: how much is priced ? » – from Goldman Sachs

Better macro, improvind and sentiment improving, there are many positives for European equities, according to Goldman Sachs’s strategy team.

PMI are going up and point to an accelerating economic growth in 2017. European equities are very sensitive to global growth (A pp move in sales-weighted GDP growth adds 11 pp to European EPS growth according to Goldman).

Question is: after the rally, how much of the reflation trade is already priced in ? Not much they claim.

At the index level, « European performance has been a little lacklustre; returns are flat on the year, consistent with PMIs only at around 50 », writes Goldman in a Jan 6 note.

Why ? « Concerns about banks combined with political risks and deflationary fears have held European equities back. These factors are likely to diminish in 2017 in our view (perhaps with the exception of political risk). The European ERP has already fallen slightly from 8.9% in the summer to 7.4%. »

Source: Goldman Sachs

The most important point they make is about earnings, where they expect 12% growth in 2017 (remember consensus has always been bullish on European earnings growth just to continuously revise them down – but things can change).

In terms of sectors, they claim cyclicals have already priced quite a bit of the reflation trend. Banks, on the other side, might still have some room to go.

In a previous report, Goldman Sachs also noted that over sectors have been lagging in terms of valuation – think of telecoms, pharma and utilities.

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