Goldman most upbeat on Japan, Europe stocks in 2014

Tomohiro Ohsumi | Bloomberg | Getty Images

Goldman Sachs is most bullish on Japanese and European equities in 2014, according to the investment bank's latest asset allocation report, maintaining an overweight rating on both markets.

It set a 2014 target of 1450 for Japan's Topix index, and 360 for the - or 16 and 12 percent higher than current levels, respectively. The indexes have risen 45 and 15 percent so far this year.

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"We expect steady progress on the Abenomics' growth reforms during 2014, think the reflation story will support returns, and see the positioning as relatively light," Goldman strategists wrote in a report on Tuesday.

In Europe, Goldman expects corporate margins to pick up from cyclically low levels, and for that to support returns.

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"There are still latent risks in Europe due to the large outstanding debt stocks, but the near-term risks from this have been declining and we do expect European growth to pick up," they added.

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Meanwhile, the bank said while it is underweight Asia ex-Japan equities over the next three months, it is neutral on the region over a 12-month horizon.

"Markets will start to focus more on the good 2015 earnings outlook as we move through 2014. However, especially in the near term, growth momentum does look better elsewhere and we therefore stay underweight over 3 months," strategists said.

It sees the MSCI Asia Pacific ex-Japan index rising to 525 by end-2014 - marking 12 percent upside from current levels. The index is up just 1 percent since the start of 2013.

As for the U.S. market, Goldman says it is neutral on the country's equities over the next three months, but underweight over 12 months.

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"Longer term the return potential for the U.S. market is dampened by limited room for valuation and margin expansion given the strong recovery we have seen already," they said.

The bank's 2014 target for the S&P 500 stands at 1900 - over 5 percent higher than current levels. The S&P 500 has had a stellar run over the course of 2013, up more than 26 percent since the start of the year.

—By CNBC's Ansuya Harjani; Follow her on Twitter:@Ansuya_H