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1、HOW INVESTABLE IS EUROPE?ISSUE 130|August 1,2024|4:00 PM EDTVGlobal Macro ResearchInvestors should consider this report as only a single factor in making their investment decision.For Reg AC certification and other important disclosures,see the Disclosure Appendix,or go to Goldman Sachs Group,Inc.Ju

2、st as Europe emerged f rom t wo years of st agnat i on,weak survey dat a,i ncreased poli t i cal ri sk,and st ruct ural i ssues have put t he regi on s out look back i n quest i on.So,how si gni ficant are t hese challenges,and how i nvest able i s Europe?GS GI R s Jari St ehn sees a di mmer cycli c

3、al out look,whi ch could become even more so i f Trump i s reelect ed and i mplement s hi s proposed t ari f f s.Bruegel s Jean Pi sani-Ferry i s sli ght ly less concerned about pot ent i al Trump t ari f f s i n t he short t erm,but worri es about t he lack of cycli cal moment um and ri sk of a mor

4、e i solat i oni st US.Poli t i cally,f ormer EC Presi dent Jos Manuel Barroso argues t hat despi t e t he ri se of nat i onali sm,t he t rend i n Europe remai ns t oward more i nt egrat i on,but Ferry and St ehn worry t hat Europe s poli t i cs may i mpede i t s abi li t y t o address i t s st ruct

5、ural i ssues.I n all,BlackRock s Helen Jewell beli eves Europe i s qui t e i nvest able and expect s European equi t y out perf ormance vs.t he US,whi le GS GI R s Sharon Bell sees a t ri cki er i nvest i ng landscape.But bot h see compelli ng opport uni t i es i n Europe and hi ghli ght one part i

6、cular area:t he UK.“I NTERVI EWS WI TH:Jos Manuel Barroso,f ormer Presi dent of t he European Commi ssi on and Pri me Mi ni st er of Port ugal,Chai rman of I nt ernat i onal Advi sors at Goldman Sachs Helen Jewell,CI O of Fundament al Equi t i es at BlackRock Jean Pisani-Ferry,Seni or Fellow at Brue

7、gel and t he Pet erson I nst i t ut e f or I nt ernat i onal Economi cs Jari Stehn,Chi ef European Economi st at Goldman Sachs SNAPSHOT:EUROPEAN MACRO ASSET VI EWS Mi chael Cahi ll,George Cole,Lot fi Karoui,and Si mon Freycenet,GS Market s Research BRUSSELS AFTER PARI S:EU POLI CY SHI FTS Fi li ppo

8、Taddei and Alexandre St ot t,GS Europe Economi cs Research THE UK-EU RELATI ONSHI P:A LABOUR RESET James Moberly,GS Europe Economi cs Research EUROPE:BE SELECTI VE I N A TRI CKI ER MARKET Sharon Bell,GS Europe Port f oli o St rat egy Research WHATS INSIDEofAllison Nathan|alli son.nat .AND MORETOP MI

9、NDJenny Grimberg|jenny.gri The European growt h out look has cert ai nly di mmed.-Jari St ehn Europe s longer-t erm out look i s.concerni ng,as t he regi on i s f aci ng several st ruct ural challenges t hat I am worri ed i t lacks t he poli t i cal capaci t y t o t ackle.-Jean Pi sani-FerryDespi t

10、e worri es about t he ri se of poli t i cal nat i onali sm and ext remi sm i n Europe,ext ernal f act ors are li kely t o cont i nue pushi ng t he Uni on t oward morenot lessi nt egrat i on over t he medi um t erm.-Jos Manuel BarrosoWhet her t he deep valuat i on gap bet ween Europe and t he US mark

11、s a t emporary or more st ruct ural shi f t i s a vali d quest i on.But t he ri sks f aci ng t he regi on look f ully pri ced i n gi ven t he magni t ude of t he European equi t y ri sk premi um t oday.-Helen JewellAshley Rhodes| NoteNote:The following is a redacted version of the original report pu

12、blished August 1,2024 32 pgs.hEl Goldman Sachs Global Investment Research 2 Top of Mind Issue 130 Macro news and views US Japan Latest GS proprietary datapoints/major changes in views No major changes in views.Datapoints/trends were focused on US growth;we expect a modest growth pickup in H2 from H1

13、 for real GDP growth of 2.3%in 2024(Q4/Q4),reflecting robust consumer spending growth,easing financial conditions,and a pick-up in equipment and AI investment.Fed policy;we expect quarterly Fed cuts starting in September to a terminal rate range of 3.25-3.5%.US election;a potential rise in tariffs u

14、nder a Trump presidency could significantly boost US inflation and weigh modestly on US growth.Latest GS proprietary datapoints/major changes in views No major changes in views.Datapoints/trends were focused on BoJ policy;we expect the BoJ to deliver 25bp rate hikes at a semiannual pace until the po

15、licy rate range reaches 1.25-1.5%in 2027.Japanese growth;while consumption,capex,and exports all declined in Q1,we expect each to turn to growth in Q2 for 2Q24 growth of 2.4%(qoq ann.)(vs.-2.9%in Q1).Japanese real wage growth,which we estimate will turn positive in 2024 for the first time in four ye

16、ars following the highest shunto base pay rise since 1990 of 3.56%.US economy:consuming its way to growth Contributions to 2024 US GDP growth(lhs,pp),real GDP growth Japan:negotiating power Shunto base pay rise and macro wage growth,%chg,yoy(rhs,%chg,at annual rate)Source:Ministry of Health,Labour a

17、nd Welfare,Ministry of Internal Affairs and Source:Department of Commerce,Goldman Sachs GIR.Communications,JTUC-RENGO,Goldman Sachs GIR.Europe Emerging Markets(EM)Latest GS proprietary datapoints/major changes in views We recently lowered our Q2/Q3/Q4 2024 Euro area GDP growth forecasts to 0.2%/0.3%

18、/0.3%(from 0.3%/0.4%/0.4%,non-ann.),which has lowered our full-year forecast to 0.7%(from 0.8%),given weaker survey data,French policy gridlock,and rising risks from international trade.Datapoints/trends were focused on ECB policy;we expect the ECB to deliver another 25bp cut in Sept,followed by qua

19、rterly cuts to a 2.25%terminal rate.UK growth;we expect 2024/25 GDP growth of 1.2%/1.6%given rising real incomes,easing financial conditions,and a more growth-friendly fiscal policy mix under a Labour govt.Latest GS proprietary datapoints/major changes in views We lowered our 2024 China GDP forecast

20、 to 4.9%yoy(from 5.0%)following a large downside surprise in Q2 GDP data.We lowered our 2024/2025 China policy rate forecasts to 1.6%/1.4%(from 1.7%/1.7%)following the PBOCs unexpected July policy rate cuts.Datapoints/trends were focused on China exports;while strength in exports has buoyed growth t

21、his year,we see several structural headwinds to Chinas export outlook in 2025 and beyond.EM macro outlook,which remains encouraging,but external political risks,including a global trade war,cast a shadow.Growth risks from a potential Trump presidency Estimated effect of a Trump presidency on Euro ar

22、ea GDP*,%China:export and policy easing boosts,for now Contribution to change in China real GDP growth,%chg,yoy *Red/pink bars represent negative effect,blue bars represent positive effect.*Includes investment in social housing and urban village renovation programs.Source:Haver Analytics,Goldman Sac

23、hs GIR.Source:Haver Analytics,Goldman Sachs GIR.Q1Q2Q3Q4-2-10123456-2-10123456GDP growth(rhs)Government spendingHousingBusiness fixed investmentConsumptionChange in private inventoriesNet ExportsGS forecastActual-4-3-2-1012345199019941998200220062010201420182022Shunto base pay riseNominal total cash

24、 wageReal wageGS forecast-1.2-1.0-0.8-0.6-0.4-0.20.0TariffTPUNATOspendUkraine spendIssu-anceGPRFCIDemandNetEffectTradeSecurity/defenseSpillovers-2.0pp-0.1pp+1.3pp+0.5pp5.24.901234562023 GDPgrowthNo CovidreboundProperty*Net exports Other policysupport2024 GSforecastWe provide a brief snapshot on the

25、most important economies for the global markets hEl Goldman Sachs Global Investment Research 3 Top of Mind Issue 130 Recent weak European survey data has raised the question of whether Europes nascent cyclical recovery may be failing.Alongside these cyclical worries,Europe is grappling with increase

26、d political risks in light of the recent European Parliament and French election outcomes and,more crucially,the prospect of heightened trade and security risks depending on the US election outcomeall of which could spell bad news for Europes economy.And these risks are coming atop daunting structur

27、al problems that continue to plague the region.Just how significant Europes cyclical,political,and structural challenges areand what that means for Europes investabilityis Top of Mind.We first speak with Jean Pisani-Ferry,Senior Fellow at Bruegel,and Jari Stehn,GS Chief European Economist,about Euro

28、pes cyclical outlook.Stehn argues that while the pickup in growth in 1H24 suggests that Europe has emerged from two years of stagnation,the cyclical outlook has dimmed owing to the recent weaker survey data and rising growth risks from trade amid a slowdown in China and proposed Trump policies shoul

29、d he win the US presidency.Stehn now expects 0.7%and 1.3%GDP growth in the Euro area this year and next,respectively,and downside risks to even this relatively weak baseline loom large.He estimates that Trumps proposed 10%across-the-board tariff on all US imports would lower Euro area growth by 1%.A

30、nd even if such tariffs arent implemented,he argues that a sharp rise in trade policy uncertaintywhich has already begun to manifest-would prove damaging for growth.Ferry also worries that Europes economy lacks sufficient momentum to withstand the cyclical headwinds it faces.While he is slightly les

31、s concerned than Stehn about Trumps proposed tariffs in the short termnoting that the more immediate concern for Europe is potential US foreign policy shifts vis-vis Ukrainehe cautions that a more isolationist US would ultimately prove extremely costly for Europe.Beyond the Trump policy risks,Europe

32、 is also grappling with domestic political challenges following the EU and French elections.Although the outcome of both elections ultimately left centrists in the drivers seat,the far-right gained a significant number of seats in the European Parliament,and the hung parliament resulting from the Fr

33、ench election portends policy gridlock.To assess the significance of these shifts,we speak with Jos Manuel Barroso,former European Commission President,who says that any surge in nationalism across Europe poses a threat to the European Union,as it has the potential to throw its very existence into q

34、uestion.But he thinks that the deepand too often underappreciatedeconomic linkages between EU countries provide strong incentive for the EU to remain united,and that external challenges in the form of a more aggressive Russia,assertive China,and unpredictable US argue in favor of morenot lessEuropea

35、n integration over the medium term.Ferry and Stehn,however,are concerned that Europes political landscape may impede its ability to address its structural challenges.Ferry argues that while the EU and French election outcomes may have proved less extreme than many feared,the underlying sentiments th

36、at led to the rise of the far-right remain.This,Ferry says,together with a lack of fiscal space,makes it difficult for Europe to address the three major structural challenges it faces:dismal productivity,economic security vulnerabilities,and climate competitiveness problems,which,left unresolved,cou

37、ld threaten the European project.Stehn and GS senior European economists Filippo Taddei and Alex Stott also see political headwinds to another structural issue:Europes fiscal position.They argue that French policy gridlock could complicate much-needed fiscal consolidation efforts there as well as in

38、 Italy while also slowing further progress on fiscal and broader economic integration,including the Capital Markets Union.Beyond its fiscal challenges,Stehn is also concerned about Europes deteriorating demographics and trade risks,which he warns could weigh on productivity,with these structural cha

39、llenges leading him to expect only 1%potential growth for the Euro area,well below the US.So,what does this all mean for European assets?GS senior rates strategists George Cole and Simon Freycenet argue that European front-end yields will likely continue to decline owing to the weak economic data an

40、d US trade risks,with French sovereign spreads also likely to widen.And GS senior FX strategist Michael Cahill sees further Euro underperformance ahead unless Europes outlook improves significantly.But the key question amid all these challenges is:how investable is Europe?When it comes to credit,GS

41、Chief Credit Strategist Lotfi Karoui expects the recent resilience in EUR IG and HY corporate bonds to extend.Helen Jewell,CIO of Fundamental Equities at BlackRock,is similarly optimistic about the outlook for European equities and expects European outperformance vs.the US owing to four factors:cycl

42、ical and earnings uplifts,Europes deep valuation gap with the USwhich suggests that the risks facing Europe are fully priced inand the European markets breadth of quality.Jewell also argues that the markets large international exposure should mitigate the impact of a weaker domestic cyclical backdro

43、p.However,she says the prospect of more restrictive US trade policies is worrying and is“the one risk that would clearly make it very difficult for Europe to outperform”.GS senior European equity strategist Sharon Bell,for her part,sees a“trickier”European equity landscape ahead.While she agrees wit

44、h the market positives that Jewell highlights and forecasts low single-digit returns for European equities that suggest slight outperformance vs.US equities,the increasingly challenging cyclical caseon top of an already tough structural casefor investing in Europe,as well as downside tail risks vis-

45、a-vis trade,leaves Bell and team recommending a neutral equity allocation across regions.So,how should European equity investors position?Jewell sees the most compelling opportunities in construction,semis,and utilities,with selective pockets of value in banks and SMIDs.And Bell recommends focusing

46、on the GRANOLAS and Value stocks active in the“buyback bonanza”.One area both Jewell and Bell highlight:the UK,which Stehn and GS UK economist James Moberly see as a bright spot in Europe,owing in part to the new Labour governments policies.Allison Nathan,Editor Email: Tel:212-357-7504 Goldman Sachs

47、&Co.LLC How investable is Europe?hEl Goldman Sachs Global Investment Research 4 Top of Mind Issue 130 Jari Stehn is Chief European Economist at Goldman Sachs.Below,he argues that Europes outlook has dimmed amid weaker survey data,French policy gridlock,and rising trade risks.Jenny Grimberg:Are recen

48、t disappointments in European economic data a sign that Europes economic recovery may be failing?Jari Stehn:The European growth outlook has certainly dimmed.The pickup in real GDP growth in H1 suggests that Europe has emerged from the stagnation of the last two years.But the latest surveys,including

49、 the flash PMIs,point to soft momentum into H2.As a result,our Current Activity Indicator(CAI)has returned to negative territory.The brightening of forward-looking indicators has also stalled,with softer PMI new orders/inventory gap and expectations surveys.This all suggests less growth momentum hea

50、ding into 2H24 than we had expected.Further clouding Europes economic outlook is the emergence of policy gridlock in France following their recent elections and rising growth risks from international trade amid slowing China growth and the potential for more restrictive US trade policies should Trum

51、p win the US presidential election.These factors led us to recently lower our 2024 Euro area GDP growth forecast to 0.7%,only marginally above last years pace.That said,the two key pillars of Europes economy recoverystrong real disposable income growth and a fading credit drag as the ECB continues e

52、asing policyremain intact.So,we continue to expect growth to improve over the next year,at a 1.3%pace in 2025.But the new growth headwinds weve discussed have narrowed Europes path to above-trend growth and have tilted the risks to the 2025 outlook to the downside.Jenny Grimberg:Germany seems to be

53、in the crosshairs of many of the challenges facing Europe.How concerned are you about its economic outlook?Jari Stehn:Germany contracted in Q2 and its outlook is concerning.China is a very important German export market,but with Chinas economy slowing and tensions between the West and China rising,G

54、erman exports to China have slowed.China is also a rising competitor to Germany and gaining market share at its expense.So,Germany,and Europe more broadly,need to diversify away from China,but this will likely be a slow process given the difficult balance between diversification aims and negative ec

55、onomic spillbacks.Germany is also very reliant on global trade more broadly,so a Trump trade war could affect it more than other European countries,as we saw in 2018/19.That said,reasons exist to believe that Germany will return to growth over the medium term.The countrys industrial sector should be

56、nefit as energy prices and interest rates continue to decline,and Germany has by far the strongest public balance sheet across advanced economies,which gives it significant scope to expand investment.So,the German economic story isnt all negative.But the recent data disappointments and looming trade

57、 risks certainly make it more concerning.Jenny Grimberg:What potential repercussions could the policies that Trump has signaled he would pursue if he wins the US presidential election have for the Euro area?Jari Stehn:Proposed Trump policies could have profound implications for Europes economy along

58、 two main dimensions:renewed trade tensions and security pressures.Trump has pledged to impose a 10%across-the-board tariff on all US imports,but even if such tariffs arent ultimately implemented,the sharp increase in trade policy uncertainty would weigh on European growth.Europes economy slowed sha

59、rply during the 2018/19 Trump trade war,which owed more to the threat of tariffs and uncertainty around their size and scope than to the tariffs themselves.Weve found that this uncertainty was very damaging for European activity and investment.So,even in the event of smaller tariffs,Europes economy

60、could still incur substantial damage.We estimate that Trumps proposed tariffs would lower Euro area GDP growth by 1%and boost inflation by a relatively modest 0.1pp.Given the uncertainty around the US election outcome,were currently treating the potential growth hit from a renewed trade war as a ris

61、k rather than as our baseline.But trade policy uncertainty has already begun to rise,which could start to dampen confidence in Europe even before the election outcome is known.On the security front,Trump expects European countries to spend at least 2%of GDP on defense,as required of NATO members.And

62、 should Trump end US military aid to Ukraine,we estimate that Europe would need to spend an additional 0.5%of GDP on defense annually.This increased spending should boost growth.But modest military spending multipliers in Europe and upward pressure on long-term yields from the resulting higher defic

63、its would likely limit this boost.Jenny Grimberg:Could the dimmer growth outlook and other looming risks lead the ECB to cut more/faster?Jari Stehn:Its possible.The ECB has not provided specific guidance on the next rate cut,likely reflecting continued stickiness in underlying inflation.But early wa

64、ge indicators for Q2 have weakened,with recent ECB surveys pointing to additional cooling into next year.That,along with our lower growth forecasts,leaves us more confident that the ECB will cut again in September and December.However,renewed growth risks also raise the likelihood of sequential cuts

65、,especially in 1H25.Taylor rules point to additional cuts worth 30-40bp if Trump is reelected and implements his proposed tariffs,reflecting the large hit to growth that more than outweighs the modest increase in inflation.So,we now see a 30%chance of faster ECB cuts,which puts our probability-weigh

66、ted path for the policy rate well below market pricing.At the same time,US tariffs would likely weaken the case for Fed cuts given the relatively smaller US growth hit and larger US inflation boost we anticipate,so trade tensions could lead to greater monetary policy divergence between the US and Eu

67、rope.While such divergence isnt concerning in and of itself,the bigger growth hit in Europe vs.the US that it reflects is worrying.After the last two years of stagnation,Europe needs Interview with Jari Stehn hEl Goldman Sachs Global Investment Research 5 Top of Mind Issue 130 a growth pick-up to ha

68、ve any hope of closing its output gap with other countries,or else risks falling further behind.Jenny Grimberg:What is the market missing that is leading it to underprice ECB cuts?Jari Stehn:Many investors are skeptical that further progress on disinflation will occur.While we similarly dont expect

69、much progress in the near term,we remain fairly confident that inflation will return toward target next year,and believe the ECB is more inclined to be forward-looking on that front than many appreciate.Investors are also interpreting the ECBs lack of forward guidance as an unwillingness to cut furt

70、her,but this is likely more a function of their communication strategy than of a belief that inflation progress has stalled.Indeed,recent comments from ECB officials indicate growing confidence that wage growth will decline significantly next year.And,with respect to growth,investors seem to be unde

71、restimating the downside risk of a renewed trade war,which we believe is the key risk that could motivate the ECB to deliver sequential cuts.Jenny Grimberg:Beyond the cyclical challenges,Europe also appears to be grappling with several structural issues.How concerned are you about Europes structural

72、 outlook?Jari Stehn:Europe is indeed facing a battery of structural challenges.It has made good progress on addressing some of these,such as short-term energy shortages,but several others will increasingly weigh on Europes economy over the longer term.Europes population is aging even more so than ma

73、ny other developed countries.Strong immigrationlargely from Ukrainehas mitigated these demographic issues,but with that now near its peak,Europes demographic situation is set to deteriorate rapidly,which will undoubtedly weigh on growth.Europe is also in a difficult fiscal position.EU fiscal rules p

74、ut pressure on countries to pursue fiscal consolidation.But Europe will also need to make significant investments in defense,the climate transition,etc.ahead,though the EUs fiscal goals may constrain such efforts.And,of course,the trade risks weve discussed will also matter structurally,as they woul

75、d weigh further on productivity in Europe if they impede Europe from importing productivity-enhancing technology and innovation from the US and beyond.These structural challenges lead us to expect only 1%potential growth for the Euro area,well below the close to 2%we estimate for the US.Jenny Grimbe

76、rg:How could the outcomes of the recent European Parliament and French elections affect fiscal consolidation efforts?Jari Stehn:While the far-right gained seats in the European Parliament following the June elections,the center-left to center-right coalition retained its majority,which suggests rela

77、tively limited implications for the EU fiscal outlook.The outcome of the French snap elections,however,is more concerning.While the election did not bring about a far-left or far-right majority that could have led to a significant shift in fiscal policy,it did result in a hung parliament that entren

78、ches France in policy gridlock.As a result,in France we now expect a slower pace of fiscal consolidation and continued rise in the debt-to-GDP ratio,which flies in the face of EU fiscal rules.Fiscal slippage in France could also act as a catalyst for slower consolidation in other EU countries,most n

79、otably Italy,which the European Commission has also reprimanded for its excessive deficit.Jenny Grimberg:What could the recent elections portend for further progress on fiscal/economic integration?Jari Stehn:Further steps toward integration will likely proceed only gradually.France has traditionally

80、 forcefully pushed for greater European integration,but its policy gridlock will likely limit these efforts.And with a similarly fragmented political landscape in Germanythe other strong voice for European integrationthe EU lacks a strong pro-Europe force to push for further integration,at least unt

81、il more political clarity emerges in these countries.This will be consequential for several initiatives long in the works,including the Capital Markets Union(CMU),joint defense financing,and potential successors to the EU Recovery Fund,which could all see progress stall.Jenny Grimberg:What could the

82、 recent return to a Labour Party-ruled government in the UK for the first time in over a decade mean for the UKs policy and growth outlook?Jari Stehn:Labour will be constrained by the same fiscal rule as the previous government that targets a reduction in the debt-to-GDP ratio in the fifth year of t

83、he Office for Budget Responsibilitys forecast,which limits fiscal space but does allow for a different composition of fiscal policy.We expect more spending and somewhat higher taxes than current government plans,which,on net,should provide a modest boost to near-term demand growth.So,we recently rai

84、sed our 2025/2026 UK growth forecasts by 0.1pp to 1.6%/1.5%,which puts us significantly above consensus.Firmer demand will also likely result in marginally higher wage growth and inflation,though the magnitudes are small enough that the implications for the BoE will likely be limited.Several other L

85、abour policies may also help boost longer-term growth,including planning reformswhich could support productivityhigher public sector investment,and closer trade ties with the EU.Given all that,we are constructive on UK growth and assets.Jenny Grimberg:Given everything weve discussed,will Europe be i

86、n a better or worse place in the coming years?Jari Stehn:All things considered,its hard to be confident that the European economy will be in a better place in the years ahead.Reasons for optimism do exist,including a fading growth drag as the energy situation continues to improve and a further cooli

87、ng of inflation.We also expect a small improvement in productivity over the near term as the labor hoarding that occurred post-Covid unwinds.The green sector will also likely be a source of growth,as it is well-positioned to benefit from the ongoing energy transition.And Europes institutional setup

88、is now more robust owing to the ECB backstop and the EU Recovery Fund.However,as weve discussed,cyclical and structural challenges abound,and I am especially concerned about the possibility of a US-EU trade war,which would have a profoundly negative impact on Europes economy,likely stifling growth f

89、or years to come.Even if such risks dont materialize,European growth likely still wont be outstanding given its structural issues and weak productivity growth.So,Europe will probably continue underperforming regions like the US in the years to come.hEl Goldman Sachs Global Investment Research 6 Top

90、of Mind Issue 130 Jean Pisani-Ferry is Senior Fellow at Bruegel and the Peterson Institute for International Economics.He previously served as Commissioner-General of France Stratgie,the ideas lab of the French government(2013-16),and Founding Director of Bruegel(2005-13).Below,he argues that Europe

91、s longer-term success will depend on its ability to address several structural challenges,which it may lack the political capacity and fiscal space to do.The views stated herein are those of the interviewee and do not necessarily reflect those of Goldman Sachs.Jenny Grimberg:How would you characteri

92、ze Europes economic and political picture,and what challenges is the region facing on each of these fronts?Jean Pisani-Ferry:The latest economic surveys indicate that European growth still lacks momentum.Things had improved over the past year,but monetary policy is still too cautious,especially as f

93、iscal policy has turned restrictive.In an uncertain economic and geoeconomic environment,the economy may lack the momentum needed to face its headwinds.It is time for the ECB to bring some more clarity about the pace of interest rate declines.While concerns about the last mile are valid,I view the r

94、ecent stickiness in services inflation and wages as cause for vigilance rather than worry.There is no need to question the data-driven approach that the ECB has followed.Turning to politics,the situation has fortunately remained stable at the European level.While the far-right gained power in the Eu

95、ropean Parliament following the June elections,the center-right alliance remains the largest parliamentary group,and Ursula von der Leyen has been reappointed as EU Commission President with the support of the center-right,the center-left,the liberals,and the Greens.So,the political dynamics provide

96、 some short-term relief,and the prevailing coalition is likely to prove strong enough to face economic and geopolitical challenges.Europes longer-term outlook is more concerning,as the region is facing several structural challenges that I am worried it lacks the political capacity to tackle.Jenny Gr

97、imberg:Risks for Europe could grow should Trump win the US election and implement the tariffs and foreign policy shifts hes signaled.Does that worry you?Jean Pisani-Ferry:The 10%across-the-board tariff Trump has proposed is concerning,but more so for the US than the EU.It probably wouldnt have major

98、 negative implications for Europe over the short term.The US accounts for around 20%of EU exports,so the tariff would apply to only a fraction of Europes foreign trade.And while an across-the-board tariff would be novel,Europe has already lived through a Trump Administration with all its bluster vis

99、-vis external trade.The medium-term implications could be more severe,as a US turn toward isolationism would destroy what remains of the rules-based global order and would prove extremely costly for Europe.But the potential foreign policy shifts under a Trump presidency are the more immediate worry.

100、Ukraines ability to prevail in its war against Russia will partly depend on domestic factors such as army fatigue levels,but also crucially on the amount of external support Ukraine receives,which may significantly decline if Trump is elected.And Europe isnt yet prepared to step in and fill the gap

101、that the US would leave.Jenny Grimberg:What structural issues leave you concerned about Europes longer-term outlook?Jean Pisani-Ferry:Enrico Lettas Single Market report and what we know of the key points of the competitiveness report that Mario Draghi will soon present to the EU Commission have illu

102、minated three major challenges facing Europe:productivity,economic security,and the climate transition.The productivity challenge has been well-documented:Europes productivity growth is dismal compared to the US,partly owing to Europes failure to develop innovative small companies into large firms,e

103、specially in the high-growth tech sector that drive aggregate productivity gains.The pandemic,Russia-Ukraine war,and increased tensions between the West and China have also shed light on Europes economic vulnerabilities and underscored the need for the region to rethink its economic security strateg

104、y.And the EU faces climate competitiveness problems on several fronts,including high energy prices,an uneven playing field between it and countries whose decarbonization efforts are based on different instruments,such as the Inflation Reduction Act(IRA)in the US,and little progress on building a gre

105、en industrial base,all of which complicate Europes path toward achieving carbon neutrality.And my greatest concern is that Europe lacks the proper political conditions to effectively tackle these challenges.Jenny Grimberg:But,as you said,the centrist alliance retained its majority in the European Pa

106、rliament and the far-right won only third place in the French elections.Do you take any comfort from those outcomes?Jean Pisani-Ferry:A few weeks ago,the baseline scenario was that the far-right would gain a blocking minority in Europe and would be put in charge of governing France.Neither of these

107、fears have materialized.But the underlying factors behind the rise of the far-right remain.A significant share of EU voters feels unsettled and disoriented.Left-out citizens want their leaders to listen to them and address their day-to-day problems,not tackle longer-term issues that they may perceiv

108、e as more aspirational,which makes it difficult to make progress on some of Europes structural challenges.The problem is that the agenda for economic action has largely taken shape but that political conditions are not auspicious to action.Jenny Grimberg:So,what actions should European leaders take

109、now to improve the regions economic prospects?Jean Pisani-Ferry:Europes leaders should forget about the“nice to have”and focus on initiatives that can quickly unleash Interview with Jean Pisani-Ferry hEl Goldman Sachs Global Investment Research 7 Top of Mind Issue 130 investment and deliver concrete

110、 gains.The priority should be decarbonizing the energy system.Energy is hard because it is a national prerogative at its core,but it must be addressed because it is a key component of Europes lost competitiveness.More progress on decarbonization would not only help improve its competitiveness but al

111、so improve weakened household budgets by allowing Europe to move beyond the expensive LNG it has substituted for cheap Russian gas toward renewables that will eventually be less costly.Leaders should also pursue further economic and financial integration through the Capital Markets Union,now known a

112、s the Savings and Investment Union.Such integration would enable innovative companies to develop and obtain the funding necessary to achieve scale.And leaders should remain attuned to their population and act to remove well-identified irritants such as poorly functioning public services or the sense

113、 of unease associated with uncontrolled immigration.In other words,they should aim to improve economic performance without alienating citizens.In practice,that likely means more integration when it matters,and less when it doesnt.Its all about balance.Jenny Grimberg:Even with these steps,how vulnera

114、ble would the European economy remain to external risks?Jean Pisani-Ferry:Risks would remain,which requires a reassessment of Europes economic security strategy.Such a strategy should aim to prevent and mitigate disruptions to critical imports,economic coercion through export restrictions,and broad

115、disruptions to global trade that have significant macroeconomic impacts.The first step toward achieving this security is identifying critical import dependencies,which is no easy task.However,substantial progress has been made on this front in recent years,with Mejean and Rousseaux finding that the

116、EU is import-dependent on 49 products across the energy and mining,construction,textile,and health sectors,with these products accounting for 0.5%of the total value of the EUs aggregate imports.However,the diagnosis of risks remains incomplete,with export and financial vulnerabilities not yet well u

117、nderstood.And policy instruments put in place to reduce trade dependencies are imperfect.EU-level instruments are generally weak,EU-level funding for policies aimed at expanding domestic capacity is limited,and national policies come with coordination problems.So,much remains to be done to identify

118、and reduce Europes economic vulnerabilities.And threading the needle between strengthening economic security and remaining open to tradewhich still provides an important hedge against domestic disruptionswill be difficult.Many countries have fallen into the trap of responding to trade risks by turni

119、ng more inward,but leaders should again strive for a balance between openness and protection,and Europes pivot toward economic security should not become an excuse for protectionism.Jenny Grimberg:In this context,how should Europes relationship with China evolve?Jean Pisani-Ferry:The EU should seek

120、to limit its overall trade dependency on Chinas market as part of its economic security objectives.However,this should not take the form of a hard decoupling,which would be very costly.Baqaee et al.recently estimated that,in a hard decoupling scenario,Germanys output could decline by 3-5%of GDP,and

121、possibly more.While Germany would suffer the most due to its deep China ties,the hit to other EU economies would also be significant.Fortunately,Europe intends to pursue a de-risking rather than decoupling strategy with respect to China.Unlike the US,which seeks to retain its status as the dominant

122、global power,Europe is no longer in the game of global dominance.So,it doesnt view China as a rival,though it generally remains vigilant about any potential threats from China.The differences between the US and European strategies are visible in their respective approaches toward Chinese electric ve

123、hicles(EVs).While the Biden Administration has imposed prohibitive tariffs on Chinese EVs,essentially with the intention of decoupling the US green sector from China,Europe has only levied tariffs equivalent to the unfair advantage resulting from Chinas domestic EV subsidies.Such a de-risking strate

124、gy will undoubtedly prove much less costly for Europes economy than decoupling,especially if pursued gradually.Jenny Grimberg:Does Europe have the fiscal space necessary to address its structural issues?Jean Pisani-Ferry:Europes fiscal framework unfortunately doesnt make allowances for the investmen

125、ts required to strengthen the regions security and defense and accelerate the green transition.The EU Treaty requires EU states to keep budget deficits below 3%of GDP,with the aspirational aim of bringing public debts below 60%of GDP.Consistent with this,a new framework to enforce fiscal responsibil

126、ity was put in place at the beginning of the year.It assesses each countrys debt sustainability based on various factors,including potential growth,and uses that to determine the necessary fiscal adjustments a country must make.The framework helpfully allows for a more gradual fiscal adjustment for

127、countries who undertake reforms and investments that structurally improve their growth outlook.Despite numerical safeguards introduced at Germanys request,this is a positive development.But some priorities,such as improving energy competitiveness and strengthening defense,have little to do with grow

128、th,and policymakers missed an opportunity to strike a better balance between fiscal discipline and these priorities in crafting the new framework.I am not advocating for an open door on spending painted green or khaki.But these priorities deserved special treatment in the fiscal rules given their im

129、portance.Without it,solving Europes structural problems becomes even harder.Jenny Grimberg:Given everything weve discussed,how worried are you about the future of the European project?Jean Pisani-Ferry:Europe will be in serious trouble if it doesnt start addressing its structural challenges.The Euro

130、pean project is ultimately unsustainable if it cant improve competitiveness and deliver growth.Leaders must focus on improving the regions productivity,strengthening its economic security,and moving ahead with the green transition,and the worst thing that could happen to Europe would be inertia on a

131、ll fronts.Encouragingly,awareness of these challenges has grown substantially over the last several years.But awareness is only the first step.Europe must now muster the ability and willingness to solve its issues,which is far more challenging.hEl Goldman Sachs Global Investment Research 8 Top of Mi

132、nd Issue 130 European growth,mapped out*Quarterly GDP figures for Belgium,Czechia,Germany,Ireland,Spain,France,Italy,Latvia,Lithuania,Hungary,Austria,Portugal,and Sweden are 2Q24,all other countries are 1Q24.*July core inflation data not yet available.Source:Eurostat,Haver Analytics,Goldman Sachs GI

133、R.hEl Goldman Sachs Global Investment Research 9 Top of Mind Issue 130 Given Europes macroeconomic and political/geopolitical backdrop and the risks to it,whats the outlook for your asset class?RatesCore EUR and sovereign spreads George Cole and Simon Freycenet Core EUR rates.Risks to core rates in

134、Europe are skewed to the downside,especially in the front-end of the curve.European survey data has been weakening and our Current Activity Indicator is once again in negative territory.Meanwhile,the ECB remains focused on inflation risks and has been unwilling to commit to a full-throated easing bi

135、as.And while political uncertainty in France has receded as a Euro area-wide issue,it is likely to remain a modest drag on French growth.These factors,together with a possible deterioration of the trade environment under a Trump presidency,suggest that European front-end yields will likely continue

136、to fall,and that the market is underpricing ECB cuts;we expect four cuts in 2025 vs.current market expectations of three cuts.Sovereign spreads.The results of the French election were modestly constructive relative to the significant risk premium priced into OAT-Bund spreads in the run-up to it,with

137、 the outperformance vs.polls of President Macrons allies suggesting any stable coalition will need to include the center.This outcome should limit the risks associated with expansionary fiscal policy and offer Macron more leeway to steer foreign policy.However,medium-term headwinds remain.A hung par

138、liament leaves France little room to pursue debt consolidation,which,combined with uncertain international investor appetite,point to a de-rating of French credit against Euro area peers.Strong Spanish fundamentals suggest that Bonos stand to win the most from a reallocation away from French debt.Th

139、at said,given that political risk will likely remain contained to France,we also see room for compression in other semi-core sovereign spreads,such as Belgium,Finland,and Ireland.FXEuro Michael Cahill The Euro has been undervalued against the Dollar for close to a decade as measured by economic diff

140、erentials,the trade balance,and the long-run average of the exchange rate.We find that this undervaluation coincides with a material shift of portfolio flows out of the Euro area and into the US.In short,investors of all typesincluding central bank reserve managers,government pension funds,asset man

141、agers,and hedge fundshave sought higher and relatively more stable returns outside of Europe.During this period,the Euro rose closer to fair value on two occasions:in 2017 and 2020.Both occasions were marked by rising global growth optimism following policy stimulus in Europe and China.The durabilit

142、y and extent of the Euros climb in both episodes surprised us because it outpaced the relative shift in other asset classes like equities and rates.With hindsight,we find that large,unhedged cross-border flows back into European assets drove the currencys outperformance.Stronger global growth outtur

143、ns help to bring currency markets back into balance.Looking ahead,a significant shift in the outlook will be required for the Euro to climb again as it did at the beginning and end of Trumps first term.The threat of tariffs under a potential second Trump term will create uncertainty and likely weigh

144、 on cross-border investment.This is what happened in 2016 and the 2018/19 trade war.The Euro could benefit from a strong fiscal policy response around the world to potential tariffs,which we think is the most plausible path to something resembling a“currency pact.”But if Europe cannot find a way to

145、kickstart its economy and more closely match US investment returns,then the Euro will continue to underperform,which we think is the more likely outcome.CreditEUR IG and HY Lotfi Karoui As optimism over the European growth outlook has faded in recent weeks,several headwinds have resurfaced,including

146、 the ongoing growth slowdown in China,potential tariff risks under a Trump Administration,and a hung parliament in France that bodes poorly for the pace of fiscal consolidation and the countrys relationship with European institutions.But more than halfway through the year,the EUR corporate bond mark

147、et has remained unfazed by these macro headwinds.In fact,excluding the contribution of rates,both the EUR IG and HY markets have outperformed their USD peers year-to-date.Two factors have fueled this resilience in the face of rising macro uncertainty.First is the strength of investor demand and the

148、asset class attractive value proposition from an all-in yield standpoint.Second is the benign backdrop for corporate financial distress.Indeed,the iTraxx Crossover indexa widely followed EUR index of mostly high yield-rated firmshas yet to experience one default in this cycle.Given the lower sensiti

149、vity of credit to fluctuations in domestic and global growthcertainly relative to the equity marketwe think this resilience can extend.Barring a full-blown Euro area recession,which is not our economists baseline view,we expect spreads to remain within their recent range.Snapshot:European macro asse

150、t views hEl Goldman Sachs Global Investment Research 10 Top of Mind Issue 130 A history of European integration hEl Goldman Sachs Global Investment Research 11 Top of Mind Issue 130 Trust in the European Union(EU)has risen in the decade since the European sovereign debt crisis Trust in the EU,%of re

151、spondents Note:Question asks respondents if they tend to trust or tend not to trust the European Union.and relative to both the debt crisis and Covid-19 pandemic,EU citizens feel like the European economy is in a better place Perception of the European economy,%of respondents Note:Question asks resp

152、ondents how they would judge the current situation of the European economy.Support for the Euro has also grown substantially over the last decade,stabilizing at relatively high levels Support for Euro,%of respondents And citizens generally support a common defense and security policy among all EU me

153、mber states,though the support from larger countries in the EU has declined recently Support for common EU defense and security policy,%of respondents Note:Question asks whether respondents are for or against a European economic and monetary union with one single currency,the Euro.Note:Question asks

154、 whether respondents are for or against a common defense and security policy among EU Member States.Defense and security are at the top of citizens priority lists for the EU,rising in importance since before Russias invasion of Ukraine Most important issue for the EU,%of respondents *Not all categor

155、ies were included in the Fall 2021 survey.Note:Question asks which of the above areas should the EU take measures on in the medium term,i.e.in the next five years.Doesnt sum to 100 because respondents asked to pick multiple issues.Citizens generally feel optimistic about the future of the EU,with op

156、timism gradually rising since the Euro area sovereign debt crisis Optimism/pessimism about the future of the EU,%of respondents Note:Question asks respondents if they are very optimistic,fairly optimistic,fairly pessimistic,or very pessimistic about the future of the EU.Source for all exhibits:Europ

157、ean Commission(Eurobarometer),compiled by Goldman Sachs GIR.2530354045505560652005 2006 2008 2010 2012 2014 2016 2017 2019 2021 2023Tend not to trustTend to trust42%49%01020304050607080902005 2006 2008 2010 2012 2014 2016 2017 2019 2021 2023Good/Very GoodBad/Very Bad41%47%50556065707580852005 2006 2

158、008 2010 2012 2014 2016 2017 2019 2021 2023EUGermanyFranceItaly606570758085902005 2006 2008 2010 2011 2013 2015 2016 2018 2020 2021 2023EUGermanyFranceItaly00.10.20.30.40.5Trade w/countries outside the EUIndustryDigital technologies/transformationDemocracyResearch and innovationEducation and trainin

159、gSocial equalityAgricultureEmploymentEconomyMigrationHealthClimate and the environmentSecurity and defenseCurrentFall 2021*20%25%30%35%40%45%50%55%60%65%70%2008 2009 2011 2012 2014 2015 2017 2018 2020 2021 2023Optimistic/Very OptimisticPessimistic/Very Pessimistic35%62%The state of EU public opinion

160、 hEl Goldman Sachs Global Investment Research 12 Top of Mind Issue 130 Jos Manuel formerly served as President of the European Commission(2004-14)and Prime Minister of Portugal(2002-04).He is Chairman of International Advisors at Goldman Sachs.Below,he argues that,despite the rise of nationalism in

161、many European countries,the overarching trend in Europe remains toward more integration,especially on defense.The interviewee is an employee of the Goldman Sachs Executive Office Division,not Goldman Sachs Research,and the views stated herein reflect those of the interviewee,not Goldman Sachs Resear

162、ch.Allison Nathan:How concerning is the shift in Europes political landscape following the recent European Parliament elections for the future of Europe?Jos Manuel Barroso:The outcome was not as extreme as many people predicted.Pro-European forces retained a clear majority,with the center-right Euro

163、pean Peoples Party(EPP)increasing its number of seats.But the far-right parties,including Frances National Rally,gained enough seats to become the third largest group in the Parliament.In France,the rise of the far-right subsequently faltered,with Marine Le Pens National Rally coming in only third i

164、n the snap legislative elections that soon followed the European Parliament elections,which underscores the complexity of the situation.But,even so,the rise of political extremism no doubt presents a challenge for Europe.That owes less to the actual degree of extremismEuropean politics are arguably

165、less polarized than US politics as the recent shocking events and rhetoric in the run-up to this years US presidential election demonstrateand more to the nature of the EU as a supranational institution.This leaves the EU particularly vulnerable to surges in nationalism because each surge has the po

166、tential to put in question the very existence of the European Union,whereas even the most nationalistic elements in the US dont seem to threaten its existence.That said,even in the EU context,more nationalism,while representing a real challenge and danger for the EU,does not necessarily conflict wit

167、h a further strengthening of the Union.This is counterintuitive but has been the reality;even with nationalism on the rise in many EU countries,European integration has moved forward in spectacular ways in recent years.For example,Europes pandemic response includedfor the first time everdebt mutuali

168、zation.The European Commission established an 800bn recovery fund package,known as NextGenerationEU,to help member states recover from the pandemic,with the package financed through the joint issuance of common debt bonds.When I was attempting to address the Global Financial Crisis and the Euro area

169、 sovereign crisis during my tenure as European Commission President,Germany and others refused to undertake such debt mutualization,so this was remarkable progress.And,in response to Russias invasion of Ukraine in 2022,the Commission established a peace facility that buys weapons for Ukraine,with fu

170、rther defense integration no doubt lying ahead,both in terms of common capabilities and common procurement.Even some of the most nationalistic parties and governments,like the right-wing populist Law and Justice(PiS)party that was,until recently,in power in Poland,or the current ruling Brothers of I

171、taly party led by Prime Minister Giorgia Meloni in Italy,are champions of a common defense for Europe given concerns about Russian aggression.So,the issue of European integration in the context of evolving national political landscapes is complex and should not be oversimplified.The reality is that

172、despite worries about the rise of political nationalism and extremism in Europe,external factorsnamely,a much more aggressive Russia,a more assertive China,and a more unpredictable USare likely to continue pushing the Union toward morenot lessintegration over the medium term.And that applies not onl

173、y to the European Union,but also to the United Kingdom,which is also increasingly grappling with the prospect of less US support and protection and,in turn,the need to bolster European defense.This is truly a major development;Ive worked with NATO since the 1980s as Deputy Foreign Minister and Forei

174、gn Minister of my country,and this is the first time in my lifetime that Europeans are thinking seriously about their common defense.Allison Nathan:Does the less extreme outcome of the French election compared to the EU elections signal that the European Parliament just doesnt matter that much?Jos M

175、anuel Barroso:The European Parliament is important,as it is a directly-elected body,which provides legitimacy.But it is a distant entity.Among the 27 EU member countries that have nearly as many official languages,most European voters are unaware of the European Parliaments work,so it does not wield

176、 the same influence as,say,national parliaments or the US Congress that are closer to voters,and does not play a critical role in driving the EUs policy direction.Rather,the power in Europes institutions lies with the European Council,which is comprised of the heads of governments of all EU member c

177、ountries and decides the overarching strategy for the direction of the EU,and with the Commission,which is the executive body.Case in point:when the European Commission proposes legislation,if the national governments accept it,the European Parliament almost always does too after some negotiation an

178、d possible amendments.So,the Parliament plays an important but not really decisive role.Allison Nathan:With that in mind,do the political and economic challenges facing the largest EU countries with the most influence over the European Council and the direction of EU policyFrance and Germanyworry yo

179、u?Jos Manuel Barroso:Of course,the weakening of these important countries also weakens the Union.But we must put these countries challenges into perspective.As discussed,the far-right party in France that is critical of the pro-European consensus came in third in the recent legislative elections,and

180、 President Macron,who represents France in the European Council,will retain his status until the next presidential election Interview with Jos Manuel Barroso hEl Goldman Sachs Global Investment Research 13 Top of Mind Issue 130 in May 2027.Nobody knows what will happen at that point.If a country lik

181、e France elects a leader that clearly opposes the European Union,that would certainly be a decisive moment and potentially lead to a meaningful shift in the EUs policy direction,but thats not the situation today.As for Germany,the current ruling coalition,while contending with daunting economic chal

182、lenges,low popularity,and internal disagreements,remains strongly pro-European and Germany will,with this and the next government,no doubt maintain a European orientation.All told,of the 27 countries in the EU today,only two governments can be classified as Euroskeptics:Hungary and Slovakia.But with

183、 all due respect to those countries,they dont have the weight to seriously challenge the European Unions path toward integration,as clearly demonstrated by,for example,the EUs unwavering support for Ukraine despite Hungarian Prime Minister Viktor Orbans constant objections.So,yes,challenges exist,bu

184、t the European Union is more resilient than most people usually acknowledge.Remember that the conventional wisdom during the sovereign debt crisis was that Greece would leave the Euro.Even Nobel Prize-winning economists expected this.But they were wrong.The EU was able to resist those threats to its

185、 dissolution and the Euro remains the second most important global currency after the Dollar.All in all,the overarching trend in Europe remains toward integration rather than disintegration.Allison Nathan:What are people missing that leads them to underestimate Europes resiliency?Jos Manuel Barroso:

186、People tend to underestimate the depth of the economic linkages between EU countries.Even though a far-left Euroskeptic government came to power in an EU member countryGreecefor the first time in the mid-2000s,the country found that it had no alternative but to support the European Union,and Europea

187、n countries had no alternative but to support Greece,given the degree of economic integration.For example,a car made in Germany may use components from 14 European countries,so they are really“European”cars rather than“German”cars.And the supply chains of many companies based in northern Italy are m

188、ore closely integrated with companies in Germany than with companies in southern Italy,while companies in western Germany are more integrated with companies in northern Italy than in eastern Germany.So,Germany quickly came to the aid of northern Italy when the pandemic began there,because not doing

189、so would have spelled economic disaster for Germany.This economic integration is precisely the point ofand largely explains the success ofthe EU to date,but is often underappreciated by observers both inside and outside the EU.The interests and incentives for the Union to remain united are very stro

190、ng,which leaves me confident that it will remain so.Allison Nathan:But wasnt that also true for the UK?So,does Brexit give you cause for concern?Jos Manuel Barroso:When David Cameron told me,as European Commission President,that he planned to hold a referendum on the UKs exit from the European Union

191、,I told him that was a mistake if his end-goal was for the UK to remain part of the EU,because when you criticize the EU from Monday to Saturday,you cant expect people to vote to remain part of it on Sunday.But he disagreed,and Brexit was the outcome.So,Brexit was a lesson in how costly mistakes of

192、political judgment can be.Of course,its possible that something similar could happen with another European country.But at present its unlikely.Public opinion polls in Europe show that support for the European Union is currently higher than before Brexit in all countries,even in countries where the g

193、overnment is critical of the EU.So,Brexit has proven more of a vaccine than a virus for the EU.Allison Nathan:Is Labours landslide victory in the recent UK election likely to alter the UK-EU relationship?Jos Manuel Barroso:I was in touch with members of the Shadow Cabinet”before this Government was

194、formed and it seems committed to resetting the relationship.But this will likely be a pragmatic reset rather than the UK asking to rejoin the EU or even the customs union or the single market.The new Prime Minister Keir Starmer is broadly considered to be a credible leader with a real mandate and a

195、reliable partner.So,I expect more and sincere cooperation in key areas where UK-EU incentives are aligned,such as defense.Of course,the degree and urgency of increased cooperation on defense will largely depend on the outcome of the US election.If Trump wins,the UK and EU will likely move closer on

196、European defense and all areas related to national security.Allison Nathan:Even if Europe has shown resiliency up to now,is it really up to the task of meeting the geopolitical,security,and economic challenges that may lie ahead?Jos Manuel Barroso:Yes,because Europe has no choice but to meet these c

197、hallenges.Its true that Europe currently lacks sufficient integration on defense to face Russia on its own,so NATO is essential to European security.But a total paradigm shift has been taking place whereby virtually all northern European countries and beyond are actively thinking about Europes commo

198、n defense against the threat of further Russian aggression.So,while Europe is not ready to face this threat alone today,and NATO is and will remain indispensable,Europe will grow in defense identity and capabilities.As demonstrated by the European energy crisis that followed Russias invasion of Ukra

199、inewhich European leaders ultimately navigated better than expectedthe EU tends to be more reactive than proactive.But its able to make the tough decisions when necessary.All that said,the core problem Europe faces remains an economic one.It continues to lack the growth mindset of the US and lags th

200、e US and China in investment in the critical areas of technology and science.For Europe to continue to thrive,it must become more serious about its own productivity and competitiveness and gain scale in its economy and businesses.In particular,Mario Draghis upcoming competitiveness report will certa

201、inly identify areas,like the pandemic response and defense,where European integration has progressed,but also a key area where it has notthe internal market.The fact that Europe still lacks a capital markets unionwhich the European Commission first attempted to launch under my leadership over a deca

202、de agois inexcusable.More progress must be made in this area for the European project to reach its full potential,but I remain hopeful that it will be.hEl Goldman Sachs Global Investment Research 14 Top of Mind Issue 130 Source:European Union,Goldman Sachs GIR.The role of the European Parliament hEl

203、 Goldman Sachs Global Investment Research 15 Top of Mind Issue 130 European Parliament breakdown hEl Goldman Sachs Global Investment Research 16 Top of Mind Issue 130 Filippo Taddei and Alexandre Stott see limited policy impacts from the EU election,but more from Frances hung parliament With the Eur

204、opean Parliament election outcome largely suggesting the status-quo for European Union(EU)policy ahead,markets remain focused on the hung parliament that resulted from the French snap elections and what this gridlock could mean for French and EU policy.We see two main implications of French policy g

205、ridlock for the EU.First,likely fiscal slippage in France could act as a catalyst for slower fiscal adjustment in other countries,most notably Italy.Second,Frances traditional role of providing steady support for further European fiscal and economic integration could diminish,potentially stalling pr

206、ogress on these efforts,including around the creation of a single market for capital.Modest shift to the right for the European Parliament Composition of the European Parliament,%of total seats Source:European Parliament,Goldman Sachs GIR.and a hung parliament for France,with a few coalition options

207、 Coalition options in a hung parliament(National Assembly),number of seats Source:French Parliament,Goldman Sachs GIR.Two new parliaments,only one majority still intact While parties most strongly opposed to European integrationPatriots for Europe(Pfe),European Conservatives and Reformists(ECR),and

208、Europe of Sovereign Nations(ESN)gained roughly 70 seats in the 720-seat European Parliament in June EU elections,the pro-European ruling coalitionEuropean Peoples Party(EPP),the Progressive Alliance of Socialists and Democrats(S&D),and Renew Europesecured a comfortable majority.And EU Commission Pre

209、sident Ursula von der Leyen secured a second term.The European Councilthe central forum directing European policy,comprised of the various heads of governmentwill also retain the same composition.As a result,we see limited implications of the recent political developments at the EU level for the EU

210、policy agenda.However,the snap elections in France that President Macron called following the convincing victory for the French far-right party,National Rally,in the EU Parliament elections has produced a hung parliament with no clear majority for any party/alliance,putting France firmly into policy

211、 gridlock.So far,the impact on EU policy has remained limited.And the initially broad increase in risk premia across Euro area assets in the run-up to the election has largely retraced,with markets now pricing the French election as only a domestic issue.Lower risk premia across European assets,exce

212、pt in France Risk premia across European assets,%recovery from max selloff after snap election announcement Source:Bloomberg,Goldman Sachs GIR.Fiscal slippage spillovers However,the French election outcome will likely have broader implications for the EUs fiscal goals.Beginning this year,EU member s

213、tates must comply with revised European fiscal rules and deliver a credible fiscal plan to reduce their debt-to-GDP ratios.The European Commission has expressed its dissatisfaction with current fiscal plans in France and Italy,along with five other EU countries,and has proposed Excessive Deficit Pro

214、cedures(EDP),which require countries to take additional steps toward fiscal consolidation.Prior to the French elections,President Macron had committed to a notable fiscal consolidation in 2025,but we now expect policy uncertainty to reduce the pace of this consolidation.This fiscal slippage could,in

215、 turn,prompt slower adjustment in other countries,including Italy,as the incentives to frontload one countrys fiscal efforts are affected by the general commitment to fiscal consolidation within the broader European policy landscape.Headwinds to European integration The French election outcome will

216、also likely impact two major decisions that European policymakers face around fiscal/economic centralization.First,they have the option to mobilize additional fiscal supportabout 94bn(0.6%of EU GDP)is still available within the EU Recovery Fundto address Europes strategic priorities and scale up ind

217、ustrial investment within the next 18 months.Defense spending continues to be the most likely beneficiary of a potential increase in fiscal support.Second,EU policymakers must decide how to advance the 010203040506070EPP+S&D+REin 2019EPP+S&D+RE+Greens in 2024Right Parties in2019 (ECR+ID)Right Partie

218、s in2024 (ECR+PfE+ESN)EPPS&DREIDECRGreens/EFAESNPfE050100150200250300350400NFPCentre-left/ENSGrandCoalitionENS/LRRNLFINFP ex LFIOther CentristsEnsembleCentre-rightRNAbsolute majority=289-100-90-80-70-60-50-40-30-20-100Brussels after Paris:EU policy shifts hEl Goldman Sachs Global Investment Research

219、 17 Top of Mind Issue 130 commitment made by European Commission President von der Leyen in her July 18 statement to the EU Parliament to extend support for the Recovery Fund,which is due to expire in 2026,and activate a new European Competitiveness Fund to expand private investment capacity through

220、 public funding.Under President Macrons leadership,France has played a significant role in pushing for progress on all of these fronts,and the EU is unlikely to be able to adopt any of these measures without Frances continued support.But,continued strong support looks unlikely amid French political

221、gridlock/fragmentation.So,we expect any further progress to likely only be gradual.EU policy is a question of willingness EMU-4 fiscal stance,%of GDP Source:Haver Analytics,European Commission,Goldman Sachs GIR.not funding Business investment,%,qoq Source:Haver Analytics,Goldman Sachs GIR.including

222、the Capital Markets Union Frances more limited role will also pose headwinds to the development of financial infrastructure that can help retain European savings in the domestic economya necessary feature to scale up European investment.One such program long in the works is the Capital Markets Union

223、(CMU)that President von der Leyen recently revived by setting the objective of building an effective Savings and Investment Union in the EU.She has stressed that fragmentation of Europes capital markets facilitates the outflow of 300bn in European savings each year.So,through the CMU,its proponents

224、hope that the introduction of a pan-European Personal Pension Product to fund higher domestic private savings will unleash sizable long-term investment in the European economy.The CMU received renewed support after the recommendation of the European Council in March,with France again taking the lead

225、 in pushing for its advancement.Lack of investment is also a saving intermediation issue Savings vs.investment,%of GDP Source:Haver Analytics,Goldman Sachs GIR.And a larger than proportional share of investment funds are located in Ireland,Luxembourg,and the Netherlands Share of investment funds vs.

226、share of Euro area GDP,%Source:Haver Analytics,ESMA,Goldman Sachs GIR.However,the political headwinds to the CMU are immense given strong opposition from jurisdictions that have so far benefitted from capital markets segmentation.EU members such as Ireland,Luxembourg,and the Netherlands have receive

227、d a much larger share of investment funds by providing regulatory arbitrage.And even if tax incentives for European saving products were deployed,the CMU is unlikely to make progress if the European Council does not act pragmatically and adopt a compensation scheme for the jurisdictions that would l

228、ose out by the shift toward regulatory harmonization.But this pragmatism is unlikely to emerge before France has a new government and Macron is able to resume supporting the CMU.EU policy support increasingly critical,but elusive With Europes cyclical outlook dimming and Europe particularly exposed

229、to the risk of a policy shift and rising tariffs following the US election(see pgs.4-5),increased EU policy support is especially important to combat these headwinds.However,with France entrenched in policy gridlock,progress toward such support is likely to stall,at least until a new government is f

230、ormed in France and more political clarity emerges.Filippo Taddei,Senior European Economist Email: Goldman Sachs International Tel:44-20-7774-5458 Alexandre Stott,Senior European Economist Email: Goldman Sachs International Tel:33-1-4212-1108-1.4-1.2-1.0-0.8-0.6-0.4-0.20.00.20.42023202420252026Stanc

231、eRecovery Fund additionNet stance-1.5-1.0-0.50.00.51.01.52.02.53.0Jan-22Aug-22Mar-23Oct-23May-24Dec-24Jul-25USEA with Recovery FundEuro area14161820222426281819202122232425Euro areaUSFRESDEITPTLUATIENL051015202505101520253035Share of total EA investment fundsShare of 2024 Euro area GDPhEl Goldman Sa

232、chs Global Investment Research 18 Top of Mind Issue 130 What happened in the French elections?hEl Goldman Sachs Global Investment Research 19 Top of Mind Issue 130 Europe:far from a crisis Euro area countries sovereign bond yield spreads to German Bund yieldsa reflection of risk premiumrose followin

233、g Macrons surprising call for snap elections in France,though they remain well below levels seen during past crisis periods 10y sovereign spreads to German Bund yield,bp Source:Bloomberg,Goldman Sachs GIR.The ECBs composite indicator of system stress also suggests that stress in Europes financial ma

234、rkets remains relatively low ECB Composite Indicator of Systemic Stress(CISS),index Note:The CISS includes 15 mainly market-based financial stress measures that are split into five categories:the financial intermediaries sector,money markets,equity markets,bond markets,and foreign exchange markets.F

235、or more information see here.Source:ECB,Goldman Sachs GIR.0100200300400500600700800200720092011201320152017201920212023FranceItalySpainMacron calls for snap election in FranceCovid-19Global Financial CrisisEuro area sovereign debt crisisRussiasinvasion of Ukraine00.10.20.30.40.50.60.70.80.9200720092

236、011201320152017201920212023Covid-19Global Financial CrisisEuro area sovereign debt crisisMacroncalls for snap election in FranceRussiasinvasion of UkrainehEl Goldman Sachs Global Investment Research 20 Top of Mind Issue 130 A UK Labour victory ThereThere are are 650 MPs650 MPs in the UK House of Com

237、mons.in the UK House of Commons.The Labour Party,led by Keir Starmer,recently defeated the governing Conservative Party(the Tories)in a landslide election victory,ending 14 years of Conservative Party rule.Labours Policy PlatformLabours Policy PlatformAims to raise spending by around 9.5bn annually(

238、0.3%of GDP).Roughly half of this spend would go toward the Green Prosperity Plan,thePartys plan to make the UK a clean energy superpower by working withthe private sector to double onshore wind,triple solar power,andquadruple offshore wind by 2030 while creating 650k new jobs.The remainder would go

239、toward funding other public service priorities,including adding more police community support officers(PCSOs)andinvesting in road maintenance.SpendingSpendingPlans to fund the proposed spending increase through higher taxation,intending to raise 5.2bn annually by FY28 by reducing tax avoidance andre

240、forming the non-domicile tax regime.Additionalreformstowindfallandcarriedinteresttaxesandtheintroduction of a VAT on private school fees would bring the total increasein taxes collected to around 8.6bn annually.TaxesTaxesPledges to introduce a“genuine living wage”by changing the Low PayCommissions c

241、urrent remit to keep the National Living Wage at two-thirds of median income to consider the cost of living as well.WagesWagesPledges to reduce net migration through reforms to the points-basedimmigration system,though no numerical targets have yet been set out.ImmigrationImmigrationPledges closer U

242、K-EU trade and security ties.This would likely be doneacross two dimensions:(1)offering closer cooperation on defense andsecurity issues and(2)seeking a veterinary agreement,which wouldharmonize standards related to animal health and welfare and therebyfacilitate trade in food products.However,Labou

243、r has drawn three red lines for its EU policy:no return tothe single market,the customs union,or freedom of movement.UKUK-EU RelationshipEU RelationshipPlans to establish a National Wealth Fund capitalized with 7.3bn over thecourse of the next Parliament.These funds will be used to upgrade portsand

244、build up domestic supply chains,create new gigafactories for the autoindustry,rebuild the UK steel industry,accelerate the deployment ofcarbon capture,and support green hydrogen manufacturing.The fund will target attracting 3 of private investment for every 1 ofpublic investment.National Wealth Fund

245、National Wealth FundAims to boost homebuilding through reforms to the planning system,specifically by releasing certain areas of the green belts around majorcitiesfor homebuilding as well as reintroducing mandatory local housing targets.Planning ReformPlanning ReformAims to cut NHS waiting timesby o

246、ffering 40k more appointments weekly.Plans to double the number of cancer scanners,create a new DentistryRescue Plan,and add 8,500 new mental health staff.National Health Service(NHS)ImprovementNational Health Service(NHS)Improvement1 The Speaker is not included as part of the government or the oppo

247、sition.2 Sinn Fein would be allowed to vote if they took the Oath of Allegiance to the King and took their seats,but they choose not to do so.Note:Exhibit does not constitute an exhaustive list of Labours proposed policies.Sources:UK Parliament,Labour.org.uk,Goldman Sachs GIR.411411121 121 72729 97

248、73030LabourConservativeLiberal DemocratScottish National PartySinn FinOther320 MPs needed for a 320 MPs needed for a working majorityworking majorityhEl Goldman Sachs Global Investment Research 21 Top of Mind Issue 130 James Moberly argues that the UK-EU relationship reset Labour is pursuing should

249、boost UK growth,but that the impact will likely be limited by Labours stated red lines Following the Labour Partys decisive victory in the recent UK general elections,new Prime Minister Keir Starmer has stated that he wants to“reset”the UKs relationship with the EU.This reset has already begun,with

250、the UK agreeing to a security pact with Germany and planning for greater UK-EU cooperation on illegal migration,while Chancellor of the Exchequer Rachel Reeves has said that Labour will seek to improve its trading relationship with the bloc.A reset is welcome news from a growth perspective given Bre

251、xits negative impacts on the UK economy,though the growth benefits are likely to be limited by Labours outlined“red lines”on the relationship.A welcome reset The UKs departure from the EU has come at a significant economic price.Since 2016,UK growth has slowed relative to the economies that the UK p

252、erformed most similarly to in the years before the Brexit referendum,with UK real GDP falling short by around 5%.While part of this relative slowdown likely reflects the effects of the pandemic and the energy crisis,weakness in goods trade volumes and stagnant business investment suggest that Brexit

253、 has also played an important role.As such,re-establishing closer trading links with the EU would likely boost UK growth.We estimate that UK growth has fallen short by around 5%since the Brexit referendum UK real GDP vs.G7 doppelganger*,index,2Q16=100 *We use statistical techniques to find the best

254、combination of other countries that match the path of UK real GDP before the referendum and use the same combination to project what may have happened thereafter.Source:Haver Analytics,Goldman Sachs GIR.but a relatively limited one That said,Labours room for maneuver is constrained by its commitment

255、 to not rejoin the EU single market or customs union or to allow freedom of movement.So,how much scope exists for Labour to reverse the costs of Brexit while remaining within these red lines?Labour has indicated that it will pursue agreements on the mutual recognition of qualifications and visa arra

256、ngements for short-term business visitors.The government also intends to seek a veterinary agreement with the EU to reduce border checks on food products.While these measures would be helpful,they are unlikely to materially mitigate the economic costs of leaving the EU.The Centre for European Reform

257、 estimates that a deal to harmonize veterinary standards could boost British agrifood exports to Europe by around 2bn,equivalent to only 0.1%of GDP.Beyond these initiatives,Labour faces an important decision on the extent of regulatory alignment to pursue in other sectors.On the one hand,aligning wi

258、th EU regulations would leave the UK as a rule-taker,going against the spirit of Brexit.At the same time,regulatory alignment would likely reduce the costs to businesses from having to comply with multiple regulatory regimes.Without alignment,these costs could grow over time as UK-EU regulatory regi

259、mes diverge.And unilaterally aligning with EU regulations in certain sectors could prove useful in future negotiations around reducing trade barriers.The Tony Blair Institute has argued that such a policy could serve as a stepping stone to an agreement on mutual recognition of conformity assessments

260、i.e.the verification that products and services fulfill specified requirementswhich would further reduce regulatory barriers to trade.The Centre for European Reform has also suggested that the EUs negotiations with Switzerland and its Deep and Comprehensive Free Trade Agreements with Ukraine,Moldova

261、,and Georgia show some willingness to agree to improvements in market access in return for regulatory harmonization,which could prove to be the case for the UK as well.Early indications suggest that the Labour government is open to some degree of regulatory alignment beyond the agricultural sector.R

262、eeves has indicated that regulatory harmonization could also take place in the chemicals industry.The Product Safety and Metrology Bill included in the Kings Speech intends to ensure that“the law can be updated to recognize new or updated EU product regulations where appropriate to prevent additiona

263、l costs for businesses and provide regulatory stability”.This appears to give the government the option to align with EU regulations where it views alignment as advantageous to the UK without the need to pass primary legislation.That said,the EU will likely remain opposed to attempts to“cherry-pick”

264、the benefits of bloc membership,which may complicate efforts to improve market access.And even if the EU proves willing to negotiate mutual recognition of conformity assessments,trade frictions will exist so long as the UK remains outside the customs union and the single market.Studies have estimate

265、d that rejoining the customs union or the single market could provide the UK a notable output boost,potentially increasing UK GDP by 1-2%relative to the current UK-EU trading arrangement.But the growth upside from a resetting of the relationship will likely be more limited so long as Labour sticks t

266、o its current red lines.James Moberly,UK Economist Email: Goldman Sachs International Tel:44-20-7774-9444 80859095100105110115120200820102012201420162018202020222024UKG7 DoppelgangerThe UK-EU relationship:a Labour reset hEl Goldman Sachs Global Investment Research 22 Top of Mind Issue 130 Helen Jewe

267、ll is CIO of Fundamental Equities at BlackRock.Below,she argues that European equities will likely outperform US equities aheadwith the most compelling opportunities in construction,semiconductors,and utilities,as well as the SMID and UK markets.The views stated herein are those of the interviewee a

268、nd do not necessarily reflect those of Goldman Sachs.Allison Nathan:European equities have lagged US equities year to date and the cyclical momentum appears to have slowed.So,is that underperformance likely to continue?Helen Jewell:No.Four factors lead me to expect European outperformance ahead.Firs

269、t is cyclical uplift.Europe,which is by nature a more cyclical market than the US,is in a different and earlier part of the cycle,with ECB rate cuts already underway.Second is earnings uplift.Earnings for European companies,while only in low positive territory,have begun to accelerate,with more comp

270、anies now being upgraded than downgraded.Third is compelling valuations.After narrowing earlier this year,the valuation gap between Europe and the US has widened again off the back of French political uncertainty,from around 25%historically to 40%today.While a re-rating of European equities amid the

271、 current uncertain political/geopolitical backdrop seems unlikely,so does a further de-rating of European equities.And fourth is the breadth of quality in the European markets,which isnt necessarily new but is often underappreciated.When investors seek breadth,they often focus on equal-weighted indi

272、ces.But indices that offer a broader composition of quality than the US S&P 500 is another way to achieve breadth,and European markets offer breadth across different high-performing sectors.In fact,the composition of the European market has shifted dramatically over the last decade,with the top 10 c

273、ompanies no longer comprised of lower-returning oil/natural resources,traditional healthcare,and consumer staples companies but rather high-growth,profitable,and stable margin companies in sectors ranging from semiconductors to innovative healthcare to luxury goods.So,the European market looks very

274、different today.Allison Nathan:But given the recent disappointments in the survey data,are you concerned that the cyclicaland ultimately earningsstory could be less supportive than you expect?Helen Jewell:The recent PMI numbers were no doubt disappointing,and the potential for more macro weakness th

275、an we expect is certainly a risk to the equity story.But while European markets tend to be more cyclical markets,a large proportionroughly 60%of European earnings come from outside of Europe.Of course,the 40%of earnings more exposed to Europes cyclical picture is not insignificant.But the markets la

276、rge international exposure should mitigate the impact of a weaker European cyclical backdrop.So,while an economic slowdown in Europe wouldnt be great news for European equities,it likely wouldnt amount to a total car crash,either.The European markets large international exposure should mitigate the

277、impact of a weaker European cyclical backdrop.”Allison Nathan:You said you dont expect European equities to de-rate further.Does that mean you believe the risks facing Europe are fully priced in?Helen Jewell:The uncertainty around the European parliamentary and French legislative elections not only

278、sparked investor nervousness about the election outcomes themselves,but also reminded investors of long-held concerns about investing in the region given the many risks it faces.So,whether the deep valuation gap between Europe and the US marks a temporary or more structural shift is a valid question

279、.But the risks facing the region look fully priced in given the magnitude of the European equity risk premium today.And,to flip it around into a positive,the current large equity risk premium suggests the potential for upside should uncertainty dissipate,and conditions improve.Thats precisely whats

280、begun to occur in the UK market following Labours recent landslide victorymore UK political stability has led to renewed investor interest in UK assets that is starting to close the large valuation gap between the UK and European/US markets.Whether the deep valuation gap between Europe and the US ma

281、rks a temporary or more structural shift is a valid question.But the risks facing the region look fully priced in given the magnitude of the European equity risk premium today.”Allison Nathan:That said,some risks facing Europelike the structural slowdown in China and the potential for a more restric

282、tive US tariff regime post the upcoming electionslook daunting.Are there risks that,if realized,could derail your relatively positive view?Helen Jewell:Anything that could impact European earnings presents risk to our view.And,yes,a slowdown in China and,in particular,a weaker Chinese consumer,espec

283、ially the top-end consumer,would pose a serious risk to the luxury goods companies that are a cornerstone of the European market.The Biden Administration also recently floated the possibility of imposing severe trade restrictions to prevent China from gaining access to advanced semiconductor technol

284、ogy,which would be detrimental to European semiconductor companies as well.But,again,given the breadth of the European market,Interview with Helen Jewell hEl Goldman Sachs Global Investment Research 23 Top of Mind Issue 130 other sectors like European banks,construction,and renewables could pick up

285、some of the slack.Whether outperformance in those sectors would be enough to lead to overall outperformance is unclear,but it should at least soften the blow if any of these risks come to fruition.That said,the one risk that would clearly make it very difficult for Europe to outperform is the risk o

286、f substantially more restrictive US trade policies depending on the outcome of the US election.The one risk that would clearly make it very difficult for Europe to outperform is the risk of substantially more restrictive US trade policies depending on the outcome of the US election.”Allison Nathan:F

287、lows into European equities had begun to turn the corner after more than two years of net outflows following Russias invasion of Ukraine.Can that positive momentum persist given the risks facing the region?Helen Jewell:Its true that the start of a cyclical and earnings uplift in the region,combined

288、with global investors growing concern about the acute concentration of the US equity market,began to fuel inflows into European equities for the first time in a long time earlier this year.And we saw four consecutive months of European equity ETF buying by US investors through June,which is importan

289、t to note.The numbers were still quite small,and it will be interesting to see whether the stalled path of ECB rate cuts that acted as a catalyst in June has dented that progress,but its been progress,nonetheless.Whether that momentum continues remains to be seen,but Im hopeful that the numbers will

290、 at least remain positiveif not largegiven how underinvested investors have been in the region.Allison Nathan:You mentioned the potentially positive implications of the UK election for UK assets.How much of that is already priced in?Helen Jewell:Not enough.The UK still trades at a 15%discount to Eur

291、ope.Some of that discount is structural because of the higher weighting to Value companies in the UK market.But cyclical factors suggest that discount should narrow.As we discussed,the resolution of political uncertainty following the election that delivered a clear government mandate should help.Co

292、nsumer confidence is high in the UK versus its developed markets peers.The Pound has been one of the best performing developed market currencies.And these developments are beginning to attract flows into the country.UK midsized stocks,which are closely tied to the fortunes of the UK,have experienced

293、 three consecutive months of inflows.So,the stars are aligned for better performance,but the deep discounts remain.So,I expect some re-rating of the UK market,likely supported by increased inflows,and further earnings uplift.And,on a sector level,the UK construction sector looks particularly compell

294、ing right now.The combination of a dearth of homebuilding,BoE rate cuts,and,more structurally,increased demand for data centers and building energy efficiency upgrades leaves the UK construction sector in the middle of a perfect Venn diagram between cyclical and structural factors that should drive

295、returns.Allison Nathan:More broadly,given everything weve discussed,how should investors be positioned today?Which sectors in Europe are most compelling,and which should investors avoid?Helen Jewell:The most compelling sectors are semiconductors,which have suffered a pullback,but should continue to

296、receive structural support owing to the AI theme that is far from over,construction,which is almost as compelling in Europe as it is in the UK for all of the same reasons,and utilities,which also sit in the sweet spot of a Venn diagram between cyclical and structural drivers.European utilities have

297、lagged US utilities but benefit from many of the same drivers,so that is definitely a sector to watch.The sector to avoid would be autos,which are highly exposed to China risks.But I would note that autos comprise a very small part of the European market today.German auto OEMs,which are often seen a

298、s the powerhouse of European OEMs,comprise just over 1%of the MSCI Europe.So,the idea that an underweight in autos by global portfolio managers is negative on Europe is just wrong.The other sector Id mention is European banks,where views are mixed.Given their strong performance so far this year and

299、expectations of continued central bank rate cuts,many of our investors are now reducing their exposure to the sector.But perhaps just as many of our other,active,investors believe European banks are better positioned than ever before given their paramount role in the economy that continues to genera

300、te substantial opportunities and robust regulation that has reduced risk.But investors need to be selective in the European bank space.Were most focused on semiconductors,construction,and utilities,would be selective banks and SMIDs,and would avoid autos.”Lastly,the relative underperformance of smal

301、l and mid-caps(SMID)versus large caps in Europe and their continued de-ratingwith a rare P/E discount below 0.9 relative to large cap todayhas been a key focus for our clients,with the question shifting from identifying value to catalyzing value.SMIDs had a brief false start earlier in the year,but

302、interest rate shifts and relative earnings strength should help catalyze a comeback.That said,selectivity in SMIDs is keythe upside for SMID lies in the best SMIDs becoming large caps.So,all in all,were most focused on semiconductors,construction,and utilities,would be selective banks and SMIDs,and

303、would avoid auto.hEl Goldman Sachs Global Investment Research 24 Top of Mind Issue 130 Sharon Bell argues that the cyclical and structural case for European equities is trickier as downside risks loom large Earlier this year,we argued that the case for investing in European equities was the cyclical

304、 one.Europe would benefit from a pick-up in global PMIs,and in particular an upswing in the manufacturing cycle,along with easier monetary policy as the ECB embarked on rate cuts.But,since then,Europes much-anticipated cyclical recovery has been both dulled and pushed out,with our economists recentl

305、y downgrading their Euro area GDP growth forecasts following weak survey data(see pgs.4-5).Germany,Europes largest economy,is currently contracting and will likey see near-zero growth again in 2024.Potential trade and other policy shifts should Trump win the US presidency poses downside risk to this

306、 already-lackluster cyclical picture.Our economists estimate a 1pp growth hit from Trumps proposed 10%tariff on all US imports,which would translate into a 6-7pp hit to Europe EPS,sufficient to wipe out all EPS growth in 2025.Our base case forecasts low positive returns for European equities in 2024

307、/25,driven by modest earnings growth,continued share buybacks,and dividend growth and policy support from declining interest rates,which may be sufficient to achieve very modest outperformance relative to the US market,which remains expensive,highly concentrated,and vulnerable to any rotations out o

308、f the AI theme.But the downside risks to the outlook for European equities have grown in light of the dimmer cyclical and more uncertain US policy outlooks.A weak structural case,too The structural trade to buy Europe is also unconvincing.The structural backdrop was always relatively weak owing to E

309、uropes low underlying economic growth,aging populations,and government debt problems.European stock markets also have lower liquidity than US markets:trading volumes on the primary exchange are 14x higher in the US than in Europe,and 5x higher even after adjusting for market cap,which is a growing i

310、nvestor concern.Intense competition for investment owing to the CHIPS Act and Inflation Reduction Act(IRA)in the US combined with high regulation and taxation in Europewhich may worsen given Europes current political dynamicsis also arguably damaging investment and productivity in Europe.Finally,Eur

311、ope must contend with Chinas structural slowdown as well as the implications of increased trade tensions between the West and China.Some rays of hope While the cyclical and structural case to buy Europe is challenging,we see some positive features within the European market.One,European companies ar

312、e global,with over half their sales coming from outside of Europe.European firms have significantly raised their exposure to India in recent years.And around a quarter of European companies sales occur in the US,not through exports but through the ownership of US-based businesses,which leaves them r

313、elatively less exposed to tariff risks.So,both the European and global cyclical backdrops matter for European stocks.European companies have raised their exposure to the US Asset ownership for STOXX Europe 600,%Source:Datastream,Goldman Sachs GIR.Two,European corporates are becoming more efficient i

314、n their use of capitalbuybacks have soared and dividends have grown in recent years.Three,positioning and valuation measures suggest that most investors are already cautious on Europe.Fund flows into European equities from global investors were consistently negative for two years following Russias i

315、nvasion of Ukraine in early 2022,and Europe trades at a significant discount to the US even when adjusting for sector differences.And four,Europe tends to perform well when investors rotate into Value,so any shift from Growthwhich has been the only game in town since the Global Financial Crisisinto

316、Value should benefit Europe.In all,we expect European equities to slightly outperform US equities over the next 12m,though we think strong outperformance is unlikely given the tepid European economic recovery we expect and Europes vulnerability to political risks.So,we remain neutral across regions

317、in both our 3m and 12m global asset allocations.Flows into European equities were consistently negative for two years following the Russian invasion of Ukraine.Cumulative monthly flows,weekly data for current month,$bn Source:EPFR,Haver Analytics,Goldman Sachs GIR.0%10%20%30%40%50%60%2000 2002 2004

318、2006 2008 2010 2012 2014 2016 2018 2020 2022AmericasAsia PacificEMOther18%30%-50050100150200Jan-20Oct-20Jul-21Apr-22Jan-23Oct-23Jul-24Europe bond flowsEurope equity flowsEurope:be selective in a trickier market hEl Goldman Sachs Global Investment Research 25 Top of Mind Issue 130.and have been much

319、weaker than for all other regions Cumulative monthly flows,weekly data for current month,$bn Source:EPFR,Haver Analytics,Goldman Sachs GIR.Europe trades at a significant discount to the US and Japan 12m fwd P/E multiple for MSCI regions(data for the last 20 years)Source:FactSet,Goldman Sachs GIR.Loo

320、k to the GRANOLAS,buybacks,and UK Amid the challenging investing backdrop for European equities,we see three areas where opportunities remain compelling:GRANOLAS:Europes equity market is dominated by a small group of internationally exposed quality-growth compounders:the GRANOLAS.We created this gro

321、uping and acronym during the first European lockdown in 2020 for the largest European companies by market cap.The GRANOLAS account for roughly one-quarter of the STOXX 600s market cap,similar to the combined weight of Energy,Basic Resources,Financials,and Autos.The GRANOLAS exhibit qualities that we

322、 expect to perform well in this cycle:strong earnings growth,low volatility,high and stable margins,and strong balance sheets.They also stand to benefit from the structural shift towards passive investment.Returns for the GRANOLAS have risen over 80%in five years and with a volatility 2x lower than

323、for the Magnificent 7.We also find that the GRANOLAS have a relatively low correlation with the Magnificent 7,and so should act as a fund diversifier.The realized volatility of the GRANOLAS is on average 2x lower than for the Magnificent 7 1-year realized volatility of daily returns Source:Datastrea

324、m,Goldman Sachs GIR.Buyback Bonanza in Value stocks:European companies used to eschew share buybacks as they chose to focus on dividends or investments/M&A,the latter often providing only low returns.With valuations in certain sectors low and profitability high,share repurchases have risen sharply.6

325、0%of European companies are now buying back shares compared to around 20%historically.This buyback bonanza is concentrated in Financials and Energy,and in both cases the combination of dividends and buybacks mean investors in these sectors are seeing cash returned to them worth around 9-10%market ca

326、p per annum.We expect this trend to continue.Return of the UK:Investors have been skeptical about the outlook for UK equities,as evidenced by low valuations and persistent fund outflows.Indeed,the UK currently trades at half the valuation of the US compared to a 30-year average discount of 22%.A com

327、bination of heightened political uncertainty since the Brexit Referendum,a weak macro backdrop(owing to the painful combination of high inflation and low growth),and a lack of listed technology companies has led global investors to shun the UK.But flows have started to turn up from low levels and in

328、vestor interest has risen.The new center-left government with its large majority should bring stability along with potentially slightly more fiscal spend.It has also promised to raise homebuilding by relaxing planning restrictions(see pg.20).And the cyclical data has been much more resilient in the

329、UK than in the rest of Europe,with a pick-up in the most recent set of PMIs.The risk of tariffs is also less problematic for the UK given that its a more service-centered economy.And the Value-oriented market with little or no tech weight makes the UK a good diversifier against US tech exuberance.Sh

330、aron Bell,Senior European Portfolio Strategist Email: Goldman Sachs International Tel:44-20-7552-1341 -300-200-1000100200300400500600700Jan-20Oct-20Jul-21Apr-22Jan-23Oct-23Jul-24EuropeUSEMAsia-Pacific21.118.417.515.013.513.312.211.4810121416182022USUS ex.Big TechACWorldJapanAPxJEuropeEMUnitedKingdom

331、Interquartile RangeMedianCurrent10th-90th percentile0%5%10%15%20%25%30%35%40%45%2018201920202021202220232024Magnificent 7GRANOLAShEl Goldman Sachs Global Investment Research 26 Top of Mind Issue 130 Summary of our key forecasts hEl Goldman Sachs Global Investment Research 27 Top of Mind Issue 130 Cu

332、rrent Activity Indicator(CAI)GS CAIs measure the growth signal in a broad range of weekly and monthly indicators,offering an alternative to Gross Domestic Product(GDP).GDP is an imperfect guide to current activity:In most countries,it is only available quarterly and is released with a substantial de

333、lay,and its initial estimates are often heavily revised.GDP also ignores important measures of real activity,such as employment and the purchasing managers indexes(PMIs).All of these problems reduce the effectiveness of GDP for investment and policy decisions.Our CAIs aim to address GDPs shortcomings and provide a timelier read on the pace of growth.For more,see our CAI page and Global Economics A