1、 March 24, 2010 Europe: Portfolio Strategy Strategy Matters Equity exposure to UK government spending Ahead of the UK budget we look at stocks with exposure to UK government spending. We also look across the OECD at previous periods of fiscal consolidation; we find domestic equities have generally p
2、erformed well during these periods. Thus we do not see deficit reduction as a barrier to UK equity performance and we remain Overweight the FTSE 100.Stocks with UK government exposure We list companies where our analysts estimate more than 15% of sales are to the UK government. But we would caution
3、against using these as a group to implement government spending-related themes they are driven more by their specific sector exposures than government spending. Fiscal corrections: Lessons from the past The UK, along with almost every other developed economy, has seen a huge rise in its fiscal defic
4、it. Tackling this deficit will clearly be a priority. However, we do not see this as a big hurdle to UK equities. Historically equities have performed well during fiscal consolidations (see exhibit). World growth not domestic deficits drive UK equities We doubt fiscal consolidation will be the major
5、 driver of UK equities. Less than 20% of FTSE 100 sales are to the UK and since the mid-1990s the correlation of UK earnings with world growth has been stronger (79%) than with UK growth (52%). We remain Overweight the FTSE 100. Equity markets average performance during periods of fiscal consolidati
6、onNote: 39 periods of fiscal adjustment in OECD countries since 1975 Source: OECD, Datastream, Goldman Sachs Global ECS Research. Sharon Bell, CFA +44(20)7552-1341 Goldman Sachs International Gerald Moser +44(20)7774-5725 Goldman Sachs International Peter Oppenheimer +44(20)7552-5782 Goldman Sach
7、s International Christian Mueller-Glissmann, CFA +44(20)7774-1714 christian.mueller- Goldman Sachs International Anders Nielsen +44(20)7552-3000 Goldman Sachs International Matthieu Walterspiler +44(20)7552-3403 Goldman Sachs International The Goldman Sachs Group, Inc. does and seeks to do busines
8、s with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certi
9、fication, see the end of the text. Other important disclosures follow the Reg AC certification, or go to Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S. The Goldman Sachs Group, Inc. Goldman Sachs Global Economics, Commodities and Stra
10、tegy Research6080100120140160180200-3-2-1012345IndexYears from start of fiscal adjustmentEquity market: Relative return to the world market in Local currency Expenditure-drivenTax-drivenMarch 24, 2010 Europe: Portfolio Strategy Goldman Sachs Global Economics, Commodities and Strategy Research 2 Stoc
11、ks exposed to UK government spending Public borrowing greater than 10% of GDP UK public finances remain under pressure. In the past 12 months public borrowing has risen to close to 11% of GDP and the trend is still higher (Exhibit 1). Moreover, the governments forecasts imply that borrowing will rem
12、ain at very high levels for the foreseeable future. The governments annual budget is announced on March 24 which will focus markets on the issue of how borrowing may eventually be brought down. Exhibit 1: Public borrowing 10% of GDP in past 12 months Source: ONS. In this report we look first at comp
13、anies with exposure to UK government spending cuts in spending over the next few years look inevitable and second we consider the broader implications of fiscal consolidation on the whole market. We do not see a fiscal adjustment as a hurdle to UK equity performance quite the opposite as previous pe
14、riods of fiscal adjustment across the OECD countries seem to have been associated with outperformance by the domestic market. In addition while fiscal policy may be tightened, financial conditions in the UK have loosened considerably, more so than in the Eurozone or US. We remain Overweight the FTSE
15、 100 (see Strategy Matters: A guide to selecting countries in European equities, January 15, 2010). Companies with exposure to UK government spending In Exhibit 2 we highlight a list of companies with sales exposure to UK government above 15% (based on our analysts estimates). It is tempting for inv
16、estors to translate a negative view on UK government spending into a short position in these stocks. Although cuts in UK government spending may affect some of these companies, most of the stocks shown below have other sources of revenue or are in sectors where cuts are unlikely to be material. We b
17、elieve there are more direct assets to monetize views on the UK fiscal deficit. Credit Default Swaps (CDS), for example, are contracts through which investors can take a view on UK debt. Any changes in fiscal spending are more likely to be reflected in this latter -12.0-9.5-7.0-4.5-2.00.53.098 99 00
18、 01 02 03 04 05 06 07 08 09 10% GDP12-Month Rolling Surplus on current budgetPSNB (inverted)March 24, 2010 Europe: Portfolio Strategy Goldman Sachs Global Economics, Commodities and Strategy Research 3 asset than in stocks that have a certain percentage of revenues stemming from UK government spendi
19、ng. Bonds are another asset class that might be considered. Our Fixed Income Strategists think concerns over excessive government borrowing and sovereign creditworthiness are overblown. Their estimates suggest that, controlling for sovereign risk, 10-year gilts are very cheap compared with correspon
20、ding-maturity SONIA rates. Exhibit 2: Stocks with more than 15% sales exposure to UK government spending Source: Goldman Sachs Global ECS Research. In Exhibit 3 we show the average performance of these stocks versus their ICB level 3 sector and the market. This list of stocks underperformed the mark
21、et during last years recovery after outperforming in the bear market. This suggests the list is relatively defensive, perhaps a function of the stocks government exposure. As noted earlier, we would caution against using these stocks to implement government spending-related themes. For example the U
22、K homebuilders in the list, Bovis Homes and Persimmon, build social housing for the government and we think this area of expenditure is unlikely to be cut; RPS Group has a utilities business it runs for the government and again we consider cuts here unlikely. However, we would monitor these stocks o
23、n a case-by-case basis to avoid idiosyncratic portfolio risk. Stocks Sector (ICB Level 3) Market cap ( mn)Sales exposure to UK government3-mth relative performance to Stoxx Europe 600Caretech Holdings Health Care Equipment in the first two years markets are up 56% versus the world index in local cur
24、rency terms; for tax-driven adjustments markets on average still outperformed but by a more modest 17% in the first two years. The valuation of the equity market changes more markedly in the expenditure-driven periods (Exhibits 8 and 9). Those markets where the deficits were corrected through mainly
25、 expenditure-driven methods started at a deep discount to the world market on average. As the deficit was corrected this discount narrowed but did not entirely disappear. One reason for the deep discount of these markets at the outset may be that the expenditure-driven adjustments have often been fo
26、rced by particularly large deficits (Greece at the present time is a good case in point). In the case of the tax-driven examples, the markets started on less of a valuation discount but did not see a relative rerating. It seems that, regardless of the method, as countries solve what is seen as a pro
27、blem too large a government deficit they are rewarded with strong performing equities. No doubt this is helped by falling bond spreads and a more competitive currency. On balance a period of fiscal consolidation would not be damaging for the UK equity market in our view. Indeed we think it is likely
28、 to be positive at the margin as it will reduce the risk premium and reluctance of international investors to invest in the UK. 6080100120140160180200-3-2-1012345IndexYears from start of fiscal adjustmentEquity market: Relative return to the world market in Local currency Expenditure-drivenTax-drive
29、nImpact on Equity Market6080100120140160180-3-2-1012345IndexYears from start of fiscal adjustmentEquity market: Relative return to the world market in USD Expenditure-drivenTax-drivenImpact on Equity MarketMarch 24, 2010 Europe: Portfolio Strategy Goldman Sachs Global Economics, Commodities and Stra
30、tegy Research 7 Exhibit 8: The P/E discount narrows in the years after the start of expenditure-driven fiscal adjustments . Exhibit 9: .the DY premium also narrows Source: OECD, Datastream, Goldman Sachs Global ECS Research. Source: OECD, Datastream, Goldman Sachs Global ECS Research. Furthermore, t
31、he UK should benefit from loose financial conditions driven by low rates and the weakness of sterling. Exhibit 10 shows UK financial conditions have eased both more quickly and to a greater extent than the US or Eurozone. Exhibit 10: UK financial conditions have eased by more and more quickly than i
32、n the US and Eurozone Source: Goldman Sachs Global ECS Research World growth not domestic deficits drive UK equities In our view the deficit correction is unlikely to be the major driver of UK equities. Our list of companies which have 20% or more UK government expenditure exposure comprises five UK
33、 stocks. These UK stocks make up just 0.01% of the market cap of the FTSE 350. A tiny 0.600.650.700.750.800.850.900.951.00-3-2-1012345Years from start of fiscal adjustmentPE relative to world market Expenditure-drivenTax-drivenImpact on Equity Market (PE level)0.81.01.21.41.61.82.0-3-2-1012345Years
34、from start of fiscal adjustmentDY relative to world market Expenditure-drivenTax-drivenImpact on Equity Market (DY level)92949698100102104106Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10Euroland FCIUK FCIMarch 24, 2010 Europe: Portfolio Strategy Goldman Sachs Global Economics, Commo
35、dities and Strategy Research 8 slice compared with the huge percentage of companies that have a large proportion of international exposure. Exhibit 11 shows the aggregate sales exposures for the FTSE 100 and FTSE 250. For the FTSE 100 less than 20% of sales are to the UK. This compares to 27% domest
36、ic sales for CAC 40 companies and 32% for DAX 30 companies. Exhibit 11: FTSE100 has less than 20% sales exposure to the UK Based on companies disclosure, 2008 financial statements Source: Worldscope, Goldman Sachs Global ECS Research. International growth rather than UK growth is in our view the key
37、 driver for UK equities. The correlations below show that UK earnings have in recent years been more highly correlated with global growth than domestic growth. Exhibit 12: Correlations between annual real earnings growth and world GDP Source: Goldman Sachs Global ECS Research. This exposure to globa
38、l growth is a key factor in our Overweight stance on the FTSE 100 (see Strategy Matters: A guide to selecting countries in European equities, January 15, 2010). Our Economists forecast world GDP growth of 4.6% and 4.7% in 2010 and 2011 respectively versus consensus at 4.2% and 4.3%. Domestic America
39、s Europe (ex Domestic)Emerging MarketsAsia OthersFTSE 100 19% 22% 32% 4% 15% 8%FTSE 250 49% 13% 25% 3% 4% 5%CAC40 27% 13% 43% 5% 7% 6%DAX 32% 15% 33% 5% 7% 7%MDAX 26% 16% 34% 6% 12% 5%MIB 49% 7% 26% 9% 4% 5%IBEX 31% 10% 31% 17% 0% 10%SMI 10% 27% 39% 5% 8% 10%OMX 13% 15% 22% 21% 14% 15%AEX 8% 29% 40%
40、 5% 4% 15%OBX 51% 10% 19% 4% 7% 9%STOXX 600 NM 16% 61% 8% 6% 9%S 1% or other ownership; compensation for certain services; types of client relationships; managed/co-managed public offerings in prior periods; directorships; for equity securities, market making and/or specialist role. Goldman Sachs us
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