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Forex Flash: Contraction of risks to benefit stocks and earnings growth – Goldman Sachs

The rise in the equity risk premium over the last few years led investors to place high premium on companies with stable growth prospects, particularly top-line growth. This has benefitted our stable growers basket and sectors such as food & beverages, which is currently trading at a record premium to the market.

According to the Economics Research Team at Goldman Sachs, “We expect the contraction in the risk premium to benefit stocks with more cyclical earnings growth and selectively upgrade some sectors likely to benefit (technology, chemicals and travel & leisure). However, we are also cognizant that while a fall in the risk premium is likely to be a longer term trend there might be short-term volatility.”

First, the risk premium has already fallen substantially post Mr. Draghi’s comments in the summer in support of peripheral sovereign debt. This limits room for further falls in the near term. Second growth remains weak in Europe and it remains unbalanced with the peripheral Euro area still in deep recession and likely to continue to suffer from political risk because of this. “In our recommended asset allocation portfolio we recently downgraded our 3-month view on equities to neutral from overweight, reflecting these concerns, the rally in the market and the potential for a soft-spot in US growth in the middle of this year.” the team adds.

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The Sterling has been trading under pressure against the Greenback in the last weeks and after declining around 1350 pips since February 1st high at 1.6335, the GBP/USD seems to have found some support at 1.5000 where the pair built a consolidation movement.
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