Europe Stocks Headed for 31% Surge This Year Amid QE, Citi Says

Frankfurt Stock Exchange As It Reacts To Government 
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Traders work at the Frankfurt Stock Exchange in Frankfurt, Germany.

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European stocks are already enjoying their strongest start to a year in more than two decades. Citigroup Inc. says there’s still further to go.

European stocks will surge another 14 percent this year, Jonathan Stubbs, the bank’s head of Europe and U.K. equity strategy, wrote in a note dated March 5. Citigroup boosted its 2015 forecast for the Stoxx Europe 600 Index to 450 from 400. The benchmark gauge already rallied 15 percent in 2015 to a seven-year high.

The European Central Bank’s increased stimulus measures, improving economic data and Greece reaching a deal on its bailout have fueled equity gains. A 450 close would be 31 percent higher than the index’s level at the end of last year and would mark its best annual performance since 1999. Citigroup estimates the Stoxx 600 will reach 550 by December 2016.

“Europe has become a good news story,” a team led by London-based Stubbs wrote. “In an artificial (QE) world, why should equities be the only asset class trading at/around some fair value measure? We don’t think this can last much longer.”

The Stoxx 600 trades above its 10-year average, with a valuation of 16.7 times estimated earnings. Still, equities are attractive when considering potential earnings and dividend growth, and quantitative easing will lure investors from bonds to riskier assets, Stubbs wrote.

In a bullish scenario, the Stoxx 600 could jump 69 percent from Thursday’s close to 667 next year, he said. In a bearish case, it may climb only 14 percent to 448, Citigroup estimates.

Potential Risks

A growth shock that would push the global or European economy back into a recession and a pickup in inflation resulting in higher interest rates are among risks, Citigroup said.

The bank predicted at the start of last year that the Stoxx 600 would rise to 370, or 8 percent higher than the gauge’s actual close. In 2013, it was more accurate, forecasting the index would rally to 330, in line with the index’s 328.26 level at the end of that year.

While demand from sovereign-wealth funds and U.S. corporates has been steady in recent years, money into equity funds has been dwarfed by investments into fixed income, Citigroup said.

“We often get told that being bullish is ‘so consensus’,” Stubbs and his team wrote. “There may be many in financial markets, including some in fixed income, who see equities as attractive, but we do not believe that capital is positioned that way. We stay bullish.”

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