Brendan McDermid | Reuters
European markets got off to a solid start in 2021, with the rollout of Covid-19 vaccines, a Brexit deal and Democratic control of all three branches of the U.S. government giving investors hope for a robust economic recovery.
The pan-European Stoxx 600 was up around 2.4% year-to-date as of Tuesday afternoon, despite containment measures being implemented in a host of major economies, most notably a strict nationwide lockdown in England.
Given the slow start to vaccine rollouts and the likelihood that the new strain of the virus will ripple through the euro area, with tighter containment measures extending into February, Goldman economists now forecast a -0.1% contraction across the euro area in the first quarter of 2021, with a sharper -1.5% “double-dip recession” in the U.K.
The combination of this and adjustments to new trade barriers after the U.K.’s formal departure from the EU on January 1 renders the short-term economic outlook negative, but Sharon Bell, senior European equity strategist at Goldman Sachs, told CNBC on Tuesday that Britain’s FTSE 100 index was a “very different beast,” with around 80% of FTSE 100 sales non-U.K.
Globally, Goldman expects an annual GDP (gross domestic product) expansion of around 6.5%, above the consensus, and Bell said FTSE 100 companies with their significant international exposure will benefit from that.
“The second reason for us as well as that international exposure is just that this has become a very value-orientated index. It’s relatively cheap versus the S&P 500, for example, even versus the European markets it has got a lot of the sector exposure that has been very unloved in recent years like financials and commodities, and we think those could come back,” she told CNBC’s “Street Signs Europe.”
Goldman is also recommending investors go long on Germany’s DAX for similar reasons, for like the FTSE 100, it has underperformed in recent years and is similarly aligned with the health of global growth.
“The DAX is also quite inexpensive versus the rest of Europe, not quite as much of a discount as the FTSE 100 in the U.K. is, but the DAX also is on a modest discount to the rest of Europe,” she said.
“It’s a function of those two things: we think of them as being value indices and we also think of them as being very geared to global economic pickup.”
Vaccine and stimulus hopes
In a research note Sunday, Goldman Sachs Chief European Economist Sven Jari Stehn highlighted a series of questions which could determine the trajectory of the European recovery, notably whether after a volatile first quarter, the ramping up of vaccinations will unlock pent up services spending in the spring.
The European Union has secured a further 300 million doses of the Pfizer and BioNTech vaccine. Moderna’s option has now been approved in the U.K., leading Goldman to estimate that 50% of the population will receive the first vaccine dose by April and June in the U.K. and euro area, respectively.
This will allow for a gradual reopening of economies from March and a sharp increase in activity in the second quarter, the bank predicts.
“In light of the renewed weakness during the winter, we estimate that euro area real GDP (gross domestic product) will be 5.5% below its pre-Covid level by the end of Q1, ranging from –4.8% in Germany to –8.9% in Spain,” Stehn wrote.
“Given this pent-up demand—predominantly in services—and the Q3 experience of last year, we maintain our forecast for a sharp pick-up in real GDP growth across Europe in Q2, to +2.7% for the euro area and +5% in the U.K.”
Much of the recovery for global stock markets since the March 2020 crash has been driven by unprecedented fiscal and monetary stimulus from governments and central banks, and Goldman expects fiscal policy to remain highly accommodative through 2021.
Stehn suggested that a vaccine-led bounceback in services, expansionary fiscal policy and a “supportive global environment” with U.S. forecasts upgraded following the Democratic victories in the Georgia Senate runoff, will lead global growth to outstrip consensus forecast this year.
Goldman projects euro area real GDP growth of 5.2% for 2021 and 4% for 2022, both significantly above consensus, with the bloc’s economy returning to its pre-crisis level at the end of this year.