Photographer: Michael Nagle/Bloomberg Stocks May Fall More - Then It'll Be Time to Buy, Goldman Says

The China-led rout that is sending shock waves through global markets may get worse, and if it does, that’s when investors should turn back to equities, says Goldman Sachs Group Inc.’s Christian Mueller-Glissmann.

Тhe stock strategist who works on portfolio strategy is neutral on global stocks -- and has been since August -- but he says any further drops would create opportunities to invest. He prefers European shares because they’re cheaper than U.S. ones, and the region’s companies have bright earnings-growth prospects, according to him.

“After such a sharp correction, from a valuation point of view, you start to build that buffer that you didn’t have at the beginning of December,” Mueller-Glissmann said in a phone interview from London last week. “You do have the potential to deliver high single-digit earnings growth. Europe should do well.”

The Stoxx Europe 600 Index had its worst week in more than four years and fell further on Monday, sending its valuation to 14.2 times estimated earnings, the lowest since last January. It rebounded 1.1 percent at 10:32 a.m. in London.

But the European Central Bank is supporting the economy, and that’s poised to help the region’s companies -- companies that trade at a level that’s about 8 percent cheaper than U.S. stocks.

Goldman Sachs sees the Stoxx 600 rallying 18 percent in the next 12 months from yesterday’s close, about double the gains it estimates for the Standard & Poor’s 500 Index. Last week’s rout changed nothing to its outlook.

The bank is more bullish than others on European earnings. It forecasts profit growth of 8 percent for Stoxx 600 companies this year, compared with 5.7 percent for the average analyst projection compiled by Bloomberg. In 2017, it sees earnings rising 10 percent.
And how to weather the turmoil? Invest in financial, staples and health-care companies, as well as those that are more linked to Europe’s economic recovery, Mueller-Glissmann says. Those may be more shielded from the storm in global equities, according to him.

While he favors European shares for their return potential, Mueller-Glissmann isn’t a bear on U.S. equities. Goldman Sachs recommends investors keep their allocation to American stocks, even as it says they’re nearing the end of a long bull market.
“We don’t anticipate a U.S. recession or a global recession, and that’s required to put the U.S. into a more prolonged bear market,” he said. “At some point, valuation will get support.”