Goldman Sachs' Favorite European Country Indices

While Greece has been stealing all the headlines in Europe in recent weeks, Goldman Sachs analyst Peter Oppenheimer has been looking behind the Greece headlines to the economic health of the Eurozone as a whole. In a new report, Oppenheimer discusses Goldman’s favorite Eurozone country indices.

Sector more important than country
In the past, sector weightings in European markets have been much more important than country weightings when it comes to generating returns. However, Goldman believes that a handful of Eurozone indices will lead the way during a climate of improving growth in coming years.

Sector alignment
A big influence on Goldman’s favorite country indices has to do with each index’s exposure to Goldman’s most-and least-favorite market sectors. At the moment, Goldman favors cyclicals over defensives and consumer cyclicals over commodity or industrial cyclicals.

“The SMI is very overweight Staples, MIB and IBEX very overweight Banks, DAX in Autos and FTSE 250 in Travel & Leisure and Media,” Oppenheimer explains. According to the report, the IBEX has about 55 of its exposure to sectors in which Goldman is currently Overweight and only 5 percent exposure to Goldman’s Underweight-rated sectors.

Tricky valuations
Oppenheimer notes that complications such as earnings cycle alignment and recent collapses in bank and commodities earnings makes apples-to-apples valuation comparisons among Eurozone country indexes difficult. However, PEG ratio analysis indicates that the IBEX and MIB are the two cheapest indices and the SMI is by far the priciest.

Outlook
Determining the outcome of the Greece situation and the impact it will have on European markets is extremely difficult at the moment, but Goldman currently believes that Greece and the rest of Europe will ultimately reach a compromise that will allow Greece to stay in the Eurozone.

Goldman has Overweight ratings on MIB, IBEX, DAX ad FTSE 250. They have Underweight ratings on FTSE100 and SMI.