Goldman Sachs upgraded its three-month view on European equities to ‘overweight’, funding the move with a downgrade of US stocks to ‘underweight’.

The bank said it has been ‘neutral’ on all regions since the end of March but highlighted the better risk/reward for European equities in mid-June.

“European equities have been one of the key asset classes to benefit from a fading of Greek risks following their drawdown.

While performance potential might be limited in the near-term after the strong rebound, several supportive fundamental factors should help out-performance of European versus US equities until year-end,” it said.

It pointed to a weaker euro against the dollar, valuation support from monetary policy divergence and a pick-up in European economic growth.

GS added that historically, non-US equity markets have outperformed US equities in the 12 months after the first Fed rate hike.

As far as European indices are concerned, Goldman is ‘overweight’ Italy’s FTSE MIB, Spain’s IBEX 35, Germany’s DAX and the U.K.’s FTSE 250. The bank is ‘underweight’ Switzerland’s SMI and the UK’s FTSE 100.

The bank remains ‘underweight’ bonds and forecasts the gradual increase of bond yields to resume once Greek concerns fade.

“Inflation is not well priced in long-dated yields and the first Fed rate hike in nearly a decade would increase upward pressure on 10-year yields. However, over the near term, Greek bailout implementation risks might drive lower yields.”

GS remains ‘neutral’ on credit on a three-month horizon and its key ‘underweight’ until the end of the year remains commodities, which it said have the strongest negative return potential.

“Our commodities team argues global commodities (in particular oil and industrial metals) are in secular bear markets, reflecting a decade of high capital expenditure.”

The bank also maintained its view that US dollar-strength will resume against most of the G10 currencies and most pronounced against the euro, yen and commodity currencies such as the Australian, New Zealand and Canadian dollar. “This is driven by better US data and subdued inflation momentum in Europe and Japan, as well as continued commodity price declines.”

Source: Digital Look Financial – Michele Maatouk