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Europe, U.S. Stocks Cheap, Will Rally Further: Barclays

European and U.S. equities will rally further in the next 12 months as valuations are attractive even after the recent gains, Barclays Plc said.

“The markets are pricing in too much bad news,” Kevin Gardiner, head of investment strategy for Europe, Middle East and Africa at Barclays Wealth & Investment Management, said at a press briefing in London today. “It’s not too late to move into developed-market stocks. The rally is not likely to be reversed any time soon.”

The Stoxx Europe 600 Index (SXXP) has surged 16 percent from a yearly low as the European Central Bank agreed on an unlimited bond-buying program and the Federal Reserve announced a third round of quantitative easing. The Standard & Poor’s 500 Index has jumped 14 percent from the most-recent low on June 1, reaching its highest level since 2007 on Sept. 14.

The Stoxx 600 is trading at 12.1 times the estimated earnings of its companies, near the highest valuation in 2 1/2 years, as investors are buying shares even as analysts lower their estimates on earnings growth, according to data compiled by Bloomberg.

Still, equities in the developed world are the “most inexpensive” among the nine global asset classes Barclays invests in, Gardiner said. These include government bonds in developed markets, emerging market equities, commodities and real estate. Barclays has an overweight rating on equities in Europe and the U.S., meaning it holds more than are represented in global benchmarks.

European Earnings

The net income of companies in the Stoxx 600 will grow 17 percent in 2013, down from 27 percent forecast in January, according to the average of estimates compiled by Bloomberg.

The downgrades are likely to continue in the next three months, as growth will probably shrink “slightly further” in the second half of the year, Gardiner said.

“Markets were expecting much lower earnings than analysts,” said Gardiner. “Even if earnings expectations year- on-year are negative, that won’t stop the markets from rallying.”

Also, there may be “positive surprises” in U.S. and European company earnings over the next two to three years, Gardiner said. U.S. banks and European companies in the technology and consumer discretionary sectors such as retail and cars will surpass the broader market, he said.

Barclays’ least preferred asset class is government bonds in the developed world, as they are “very expensive,” according to Gardiner.

To contact the reporter on this story: Namitha Jagadeesh in London at njagadeesh@bloomberg.net

To contact the editor responsible for this story: Andrew Rummer at arummer@bloomberg.net

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