As Europe Stock Rally Wanes, Forecasters Look to 2016 for Record

Can European Equities Return 10% in 2016?
  • All strategists see double-digit growth for Stoxx 600
  • Most bearish estimate is for shares to rise more than in 2015

European stock strategists say 2016 is when their predictions that didn’t work in 2015 will come true.

The Stoxx Europe 600 Index will rally 16 percent from Tuesday’s close to surpass its April record, according to the average of 10 forecasts compiled by Bloomberg. Commerzbank AG, one of the most accurate at estimating the gauge’s trajectory the last two years, expects the equities to jump 18 percent in 2016, helped by the European Central Bank’s stimulus.

“It’s a liquidity-driven rally,” said Peter Dixon, Commerzbank’s global equities economist in London. “Looking back, quantitative easing did have a positive impact on equity markets, and next year the ECB may opt to extend the terms under which it is providing this liquidity. You want to continue to buy equities.”

That’s what all strategists are saying. Even the most bearish, JPMorgan Chase & Co., forecasts a 10 percent jump in the Stoxx 600 next year. Citigroup Inc., the most bullish, sees it surging 23 percent. The benchmark closed 2.7 percent higher on Wednesday.

European equities climbed as much as 21 percent this year before concerns over global growth and a disappointing boost in ECB stimulus left the Stoxx 600 up just 4.2 percent through yesterday. With a valuation of 15.5 times estimated earnings, it’s almost 10 percent cheaper than the Standard & Poor’s 500 Index.

That, and diverging policies between the Federal Reserve and the ECB have sent investors flocking to Europe. The region’s equity funds got money in 29 of the past 31 weeks, according to a Bank of America Corp. note dated Dec. 17 that cites EPFR Global data. Economists forecast euro-area growth of 1.7 percent next year -- more than in 2015 and the most since 2010 -- and ECB President Mario Draghi has pledged to further boost stimulus if needed.

While Commerzbank came close with its prediction that the Stoxx 600 would rise only 3.6 percent this year, most forecasters turned out to be too optimistic, estimating European equities would rise 8.7 percent. Exporters led the initial rally as the euro weakened, but the gains fizzled in the second quarter as the currency stabilized, while concerns ranging from Greece exiting the euro area to China’s economy slowing down and commodity prices sinking, drove equity volatility to an almost four-year high.

Next year may turn out just as disappointing as this one, according to Christian Zogg, head of equity and fixed income at LLB Asset Management in Vaduz, Liechtenstein.

“I don’t see any force which could promote GDP growth in a big way,” Zogg said. “There will be the risk of a cyclical downturn in the U.S., and it is now very difficult to tell whether another region can take over the lead in growth. Markets could see a similar pattern as this year and if they are overshooting you have to take profits.”

Andreas Nigg, head of equity and commodity strategy at Vontobel Asset Management in Zurich, says more gains wouldn’t be out of the question as the euro weakens, as that can propel earnings above expectations. Forecasters see the currency falling to $1.04 in the second quarter, and analysts estimate profits at Stoxx 600 companies will rise 5.9 percent next year, with automakers posting some of the biggest increases.

“If the euro stays weak or weakens further, that would help the Stoxx 600,” Nigg said. “A gradual economic recovery in Europe and decent economic growth in the U.S. should set the base.”

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