Goldman Says European Stocks may Fall Another 20% Before Rally

Dec. 5 (Bloomberg) -- European stocks may fall another 20 percent in the “short term” as investors grasp the possibility of deflation, before a rebound in the second half of next year, Goldman, Sachs & Co. strategists said.

The brokerage advised as part of its 2009 European equity strategy holding shares in industries less affected by an economic slowdown, including phone, healthcare and retail companies.
“While it is tempting to believe that a New Year will bring an entirely different set of market prospects the reality is often different,” Goldman wrote in a note to investors distributed today. “The start of 2009 is unlikely to bring a change in the dynamic of growth and the unlocking of credit that is required for risky assets to re-rate.”

The Dow Jones Stoxx 600 Index may drop 20 percent on a “downside risk” possibility, they wrote. A six-to 12-month rally may follow only after the first half, they wrote, lifting the European benchmark between 30 and 50 percent.
Retailers were upgraded to “overweight” from “underweight” in Goldman’s recommended allocation. The industry is dominated by food companies that are relatively less “cyclical,” it said.
The team of London-based strategists, including Jessica Binder, Peter Oppenheimer, Sharon Bell and Gerald Moser, downgraded household-goods shares to “underweight” from “neutral,” citing weaker consumer demand and cut utilities in the same way because of “high leverage and refinancing needs.”

“We expect an inflection point in economic activity and the pricing of markets in 2009, but it is likely to be from lower levels and later in the year,” they wrote. “We stay defensive in our portfolio and would underweight most cyclical sectors.”

Financial-services stocks were upgraded to “neutral” from “underweight.”