World Markets

Buy Europe, dump US stocks: Goldman

An employee views trading screens at the offices of Panmure Gordon and Co on October 20, 2014 in London, England.
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Pile into European equities and scale back exposure to U.S. stocks, Goldman Sachs recommends in the wake of progress in Greece's dealings with creditors.

The bank upgraded its three-month view on European equities to "overweight" on Monday, while downgrading U.S. stocks to "underweight," warning that they have historically underperformed in the 12 months after the Federal Reserve's first rate hike.

"European equities have been one of the key asset classes to benefit from a fading of Greek risks following their drawdown," Goldman Sachs wrote in its Global Opportunity Asset Locator report published on Monday.

"While performance potential might be limited in the near-term after the strong rebound, several supportive fundamental factors should help outperformance of European vs. U.S. equities until year-end," it said.

These factors include a weaker euro, comparatively easy monetary policy and a pickup in Europe's economic growth – which the bank expects will help drive stronger earnings and a recovery in margins.

Within Europe, the bank is overweight on Italy's FTSE MIB index, Spain's, Germany's DAX index and the U.K.'s mid-cap focused FTSE 250 index and underweight on Switzerland's and the British blue-chip FTSE 100 index.

Read MoreEurope closes higher after Greece repayment to IMF

While the bank didn't include its individual forecasts for each index, it expects the pan-European to return 1.9 percent, 5.1 percent and 12.9 percent in local currency terms, on a three-month, six-month and 12-month basis, respectively. The STOXX Europe 600 has already gotten a boost from abating Greece-related risks, rising 7 percent over the past 14 days.

Goldman isn't alone in its bullish outlook for European equities.

Bank of America (BofA) Merrill Lynch's July Fund Manager Survey published last week found rising appetite to overweight European stocks. "Despite the Greek news flow, intention to own European assets is high and rising, though global growth remains vitally important for European stocks," said Manish Kabra, European equity strategist at BofA Merrill Lynch Fund Manager Survey.

The survey found a net 40 percent of fund managers were overweight on euro zone equities. Although that's a six-month low, it remained the most popular region, with increased intentions to gain regional exposure on a 12-month view, the survey found.

US stocks to lag

By comparison, Goldman sees the U.S. benchmark S&P 500 returning negative-0.7 percent, negative-0.2 percent and a positive-3.2 percent, on a three-month, six-month and 12-month basis, respectively.

"We are underweight U.S. equities, as return potential is constrained by high valuations and margins," the bank said.

"Historically, non-U.S. equity markets have outperformed U.S. equities in the 12 months after the first Fed rate hike," it added. The Federal Reserve is widely expected to raise rates as soon as September – its first hike in nine years.

As such, the bank also favors Japanese equities on a 12-month basis. While it expects Japanese stocks to be more range-bound until year end, it sees a "firmer trend" for the market in the first half of 2016, driven by rising wages, a recovery in consumption and capital expenditure, positive earnings surprises and buying from foreign investors and the Bank of Japan. It forecasts the TOPIX index will rise to 1,850 over the next 12 months – up 11 percent from current levels.

To be sure, the bank doesn't expect all non-U.S. markets will perform well in the 12-months following the Fed's maiden rate hike.

It remains "neutral" on MSCI Asia ex Japan, saying that while valuations are attractive, it sees comparatively low earnings growth potential,with selective picks in the region.

The bank is overweight on China, India, Korea and Taiwan and underweight on Southeast Asia and Australia.