Although there are expectations of weaker UK and EU GDP growth, there is low correlation between GDP and most European Staples categories, Goldman Sachs’ Mitch Collett said in a report. He upgraded British American Tobacco PLC (ADR) BTI from Sell to Buy, while adding the stock to the Conviction List. The analyst expressed optimism regarding accelerating growth in the future.
“Our valuation target multiples are broadly unchanged as we believe the impact of a lower risk free rate may be sufficient to offset the impact of a higher ERP,” analyst Mitch Collett wrote. He explained that historical correlations implied a 50bps decline in yields would result in about 15-20 percent outperformance for European Staples versus the broader market.
Any Growth Is Good Enough
European Staples organic growth and margin expansion are being adversely impacted by structural headwinds. Despite this, the sector had “continued to be supported by P/E expansion to offset negative earnings revisions,” the analyst commented. He believes that while European Staples growth would continue to be below trend, this would not drive underperformance.
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