By Liz Moyer 
 

Goldman Sachs Group Inc. (GS) investment strategists are telling the bank's wealthy private clients to buy U.S. stocks, particularly banks, U.S. corporate high yield debt and shares of large multi-national European companies.

Sharmin Mossavar-Rahmani, the chief investment officer of Goldman's investment strategy group in its private wealth management division, said in a meeting with reporters on Friday that investors are under-invested in U.S. equities, which still have room to gain despite a 16% jump in the Standard & Poor's 500 index last year. The index is already on a tear this year, up 3% year-to-date and closing at a five-year high on Thursday.

Goldman projects as much as another 7% upside to the index this year.

"That may sound disappointing relative to historical equity returns, but it remains attractive compared to other asset classes, particularly bonds," the strategists wrote in a 77-page 2013 outlook sent to clients on Jan. 6.

Goldman's investment strategy group outlined what they viewed as a period of continued low interest rates this year that will dampen returns across a variety of assets. Investors need to lower their expectations, the strategists said. Most bonds yield very little, and hedge funds are only projected to return 5% annualized over the next five years. They also called emerging-markets stocks "relatively uninspiring."

The expected standouts will be stocks of U.S. banks and large, multinational companies based in Europe, Goldman said.

Goldman's strategists recommended the U.S. bank sector two years ago. Many financial stocks are trading at or near book value, leaving room for gains. Banks also have room to increase dividends, which could attract money from institutional investors and help boost share prices.

The sector has a prospective five-year annualized return of 16%, Goldman's strategists said, and 8% for this year. The SPDR S&P Bank ETF (KBE) is up 3.4% this year.

European stocks are also undervalued, they said. The Euro Stoxx 50 index is projected to climb nearly 10% from its current level. Stocks that make up the index, including Volkswagon AG (VOW.XE), Bayerische Motoren Werke AG (BMW.XE), Daimler AG (DDAIY), Bayer AG (BAYRY) and Anheuser-Busch InBev (BUD), are undervalued compared to indexes that track shares of their U.S. competitors.

U.S. corporate high yield debt is also attractive, the strategists said. The sector, which gained 16% last year, offers "equity-like returns with bond-like risk." Talk of a bubble in the sector late last year is overblown, the strategists said. Most of the recently issued bonds went to refinance old debt, not pile on new debt, and the credit ratings of issuers are healthier than pre-crisis levels.

-Write to Liz Moyer at liz.moyer@dowjones.com

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