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Earnings growth, buoyant economy to underpin European shares
June 29, 2017 / 10:13 AM / 5 months ago

Earnings growth, buoyant economy to underpin European shares

LONDON (Reuters) - European shares are expected to continue riding a wave of upbeat investor sentiment and are set to rack up double-digit gains this year based on a rebound in corporate earnings, a recovery in economic growth and easing political risks.

A Spanish flag flutters above the Madrid Bourse, Spain, June 1, 2016. REUTERS/Juan Medina

A Reuters poll of brokers, fund managers and analysts taken over the past week forecasts top euro zone blue chips .STOXX50E rising nearly 11 percent this year with further gains expected in the first half of 2018.

Spanish stocks .IBEX are poised to be the best performers at the country level with forecasts calling for a near-20 percent rise this year.

If the index performs as the poll suggests euro zone stocks will outpace most other major global benchmarks this year, a sharp contrast to recent years when a combination of sluggish profit growth and rising political risks dented appetite for regional stock markets, particularly among foreign investors.

Emmanuel Macron’s decisive victory in the French presidential and parliamentary elections have put investors’ minds at ease over political risks facing the region with worries over the future of the euro zone quickly making way for expectations for more regional cooperation.

That, along with a strong results from major companies and valuations which are still at a discount to the United States, has underpinned investor interest in euro zone stocks.

Euro zone stocks trade at about 15 times forward earnings compared with nearly 18 times for top U.S. stocks, according to Thomson Reuters data.

“Europe remains our favourite area in developed market equities. Economic activity is buoyant. The earnings season has been strong and the positive momentum is expected to continue,” said Monica Defend, head of global asset allocation research at Pioneer Investments.

The Reuters poll suggests the Euro STOXX 50 could press ahead and test levels last seen in 2015 by the middle of next year.

Spanish stocks are the front-runners to end 2017 as the best performing country index though other major markets are also seen posting healthy gains.

Poll medians predict Germany's DAX .GDAXI and France's CAC 40 .FCHI gaining more than 13 percent this year. Italian stocks .FTMIB are seen rising about 11 percent.

From here until year end, France's CAC and Spain's IBEX are seen making 5 percent gains while in Germany the DAX will add 3 percent, the poll found. Financial stocks are expected to be a major driver behind the rally in European stocks in coming months, in what should favour indexes such as Italy's FTSE MIB .FTMIB and Spain's IBEX .IBEX, which are heavily geared towards banks.

With the European Central Bank preparing the groundwork to normalise policy, end its bond-buying programme and eventually raise rates, the banking sector is seen best positioned to reap the benefits of higher yields and better economic growth.

Polling by Helen Reid and Kit Rees in London, additional polling by Elisa Anzolin in Milan and Indradip Ghosh, Sujith Pai and Vivek Mishra in Bengaluru; Editing by Toby Chopra

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