In a research note sent out on 3 July the bank said that while past rate hiking cycles have been negative for UK equities, the upcoming one seems so well anticipated that valuations on domestic stocks, UK homebuilders and the FTSE 250 already reflect the hikes and therefore look inexpensive at current levels.
FTSE 100 companies are not sitting quite as pretty in Goldman’s view however and it recommends going long the FTSE 250 versus the FTSE 100.
The pressure on FTSE 100 stocks comes in large part from the headwind of a rise in sterling. Goldman’s FX strategists expect a further 5% appreciation in trade-weighted sterling in the next 12 months. Earnings estimates on a Goldman-picked basket of UK stocks have fallen by almost 10% since the end of last year and there have been a number of profit warnings.
FTSE 100 stocks have a much higher exposure to movement in sterling as approximately 80% of FTSE 100 sales are non-domestic Goldman estimates, versus just 50% for FTSE 250 companies.
Goldman Sachs’ UK economists have brought forward their expectation for the time of the first UK rate hike to Q1 2015 from Q3 in response to the recent developments in the economy and Mark Carney’s public comments.
The bank's GDP growth forecasts have been upgraded to 3.4% for 2014 and 3.0% in 2015, from 3.0% and 2.7% respectively. It also considers inflationary pressures to be limited.
