European stocks will post gains next year as cheap borrowing spurs a rebound in economic growth and drives earnings higher, Deutsche Bank AG and Macquarie Group Ltd. strategists said.
The Stoxx Europe 600 Index will climb 16 percent in 2011 from yesterday’s close as demand for credit tops estimates, Deutsche Bank strategists including Gareth Evans wrote in a report today. The Stoxx 50, another European benchmark, may advance about 10 percent as concern about sovereign-debt defaults eases, according to Macquarie.
“In a mid-cycle accelerating phase, we should have decent returns and that is likely to occur in the second half,” Matthias Joerss, Macquarie’s Frankfurt-based equity strategist, said at a presentation in London today. “Going into the first quarter, you want to decrease equities but then you want to increase them as it will end up being an up year.”
The Stoxx 600 has climbed 7.8 percent so far this year even as concern that countries from Spain to Greece will struggle to rein in their budget deficits weighed on investor sentiment. The gauge rose to a two-year high today after the Federal Reserve last week pledged to buy $600 billion in Treasury bonds to spur the ailing recovery in the world’s largest economy.
“The biggest threat to our bullish equity forecast is a dislocation in the financial markets,” London-based Evans at Deutsche Bank wrote in the report. “Bank lending surveys do not suggest that such a dislocation is imminent. Stronger GDP growth could trigger the rally in equity markets that we anticipate.” Including dividends, the region’s equities will return 20 percent, he forecast.
Investors should favor stocks in “core Europe,” and gradually move to countries such as Ireland, Greece, Spain and Portugal as the year passes, Joerss said. Banks and companies most geared to economic growth should give the best returns in the second half, Macquarie forecast.
While there is a “distinct possibility of some debt restructuring at some point” in the smaller economies, larger nations such as Spain are not at risk of default, Daniel McCormack, economist at Macquarie, said at the presentation.
Deutsche Bank strategists in December last year forecast the Stoxx 600 would finish 2010 at 250, which is 8.1 percent below yesterday’s close. A poll of 16 equity strategists last year had estimated an average 11 percent rally for 2010.
This is the first annual forecast for European equities from the Macquarie team.
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