Rallying European Equities Already Catching Up to Forecasts

(Bloomberg) -- Almost everyone’s a bull on European equities, but much of the optimism may have been played out for now.

Strategists on average in a Bloomberg survey see the benchmark Stoxx Europe 600 Index gaining 2.8% by the end of the year, barely higher than predictions from a month ago. They see a 1.3% gain for the Euro Stoxx 50 Index from Wednesday’s close.

Europe’s heavy exposure to cheap and cyclical sectors is considered a big plus, given rising bond yields and inflation expectations, especially after the U.S. Federal Reserve pledged this week to remain supportive. But after a strong rally, any delays to the region’s economic recovery may weigh on the prospects for further stock gains.

The vaccine rollout has been slow so far in Europe. Italy and several regions of France including the Paris area are back into lockdown and German economic advisers warned this week that 2021 growth may be jeopardized by a renewed spike in infections. The Stoxx 600 fell as much as 0.8% on Friday on worries about inflation and the region’s inoculation delays.

But for forecasters such as Deutsche Bank AG, global growth prospects and higher cyclicality mean Europe is still the place to be. Asset allocation strategists including Bankim Chadha and Parag Thatte raised their year-end target on the Stoxx 600 to 465, implying nearly 10% upside, and forecast 59% earnings growth in Europe this year, versus 43% for the S&P 500.

“Our forecasts for earnings as well as valuation in Europe are conservative, especially if European data continues to surprise to the upside as it has for the last nine months,” said Thatte, reiterating an overweight stance on Europe over the U.S.

For UBS Group AG strategist Nick Nelson, there are attractive stocks in the autos, energy and construction sectors. “The recent U.S. fiscal package and move in bond yields extend the window of opportunity for the value trade,” he said. The strategist has raised his Stoxx 600 target for end-2021 to 470, implying almost 11% upside.

Fund managers globally have increased their allocations on value shares while at the same time reducing their exposure to technology, according to Bank of America Corp.’s March survey. A record 52% of investors believe cheaper shares will outperform growth stocks in the next 12 months, the survey showed.

The Stoxx 600 has rallied 6.4% this year, outstripping the S&P 500 Index. While the benchmark is still around 2% shy of last year’s record, some pockets may be more vulnerable to bad news. The Stoxx 600 travel and leisure index, up 21% in 2021, trades near a record high even as a lot of uncertainties remain about the summer holiday season.

And the path upward may get bumpy as the year progresses. BofA strategists including Sebastian Raedler and Milla Savova expect the Stoxx 600 to rally to 460 by the third quarter, before starting to fade as the macro economic cycle peaks.

“Once growth starts to slow from historically-elevated levels and growth momentum turns negative, as we expect, but real bond yields continue moving higher, this would be consistent with a pullback in the Stoxx 600 to 410 by year-end,” Savova said.

For tables on the Euro Stoxx 50 and Stoxx 600 polls click here; for a table on the DAX poll click here, for a table on the FTSE 100 poll click here.

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