Goldman: Why Europe will outperform

With U.S. interest rates set to rise and Europe's likely headed lower, certain assets on the continent look like a good bet, Goldman Sachs said.

It's staying overweight European equities and local-currency credit on a three-month basis to position for "tailwinds" from the European Central Bank (ECB) and the currency.

"We expect the ECB to ease further at the December meeting to counter downside risks to inflation," Goldman said in a note Wednesday, forecasting the deposit rate to be lowered by 10 basis points to negative 30 basis points. It also expects the bank to extend its quantitative easing (QE) program through the end of the third quarter of 2017.

A basis point is 1/100th of a percentage point.

That's likely to weaken the euro as funds flow out of the currency and toward assets offering better-than-negative returns.

The ECB's likely cuts come as the U.S. Federal Reserve is widely expected to implement its first hike to its benchmark rate in nine years at its December meeting. That's likely to strengthen the dollar as it will increase expected returns in the U.S.

Historically, when European and U.S. monetary policy diverged like this, "European equities have pretty consistently outperformed their U.S. counterparts past the first Fed rate hike and the outperformance gets particularly pronounced after 12 months," Goldman said.

There are certainly signs the ECB could step up its game. ECB President Mario Draghi has hinted that that the bank could look to ramp up or extend its 1 trillion euro ($1.1 trillion) quantitative easing program.

At the moment, the ECB purchases 60 billion euros worth of assets each month and has committed to doing so until at least September 2016.

The next monetary policy meeting and subsequent media conference with Draghi is set for December 3 in Frankfurt, when an announcement on expanded asset purchases is hotly anticipated.

It is also possible that the central bank might cut the interest rate on its deposit facility further into negative territory. The rate is currently negative 0.2 percent, meaning that private banks are effectively charged for parking money with the ECB.

The bank is underweight on U.S. equities and bonds.

"A weaker euro is likely to serve as a strong catalyst for outperformance of European versus U.S. equities," it said.

Another factor that may help to boost the Europe over U.S. play: positioning for the monetary policy divergence appears to be light so far, Goldman said, citing action in risk reversals, Goldman said.

It tips one of the most direct plays on the divergence between monetary policies in U.S. and Europe is to just short the euro. Its 12-month forecast for the euro is for it to fetch $0.95, but that might be reached sooner if the ECB moves aggressively in December, Goldman said. The euro was fetching $1.0611 in early European trade Thursday.