Bull Calls United in Europe as Strategists See 12% Gain
European stocks are poised for a third year of gains, restoring almost all the losses suffered during the financial crisis, as economic growth overcomes record pessimism on earnings.
Equities will rise 12 percent in 2014, according to the average projection of 18 forecasters tracked by Bloomberg News. Ian Scott of Barclays Plc says the Stoxx Europe 600 Index can rally 25 percent because shares are cheap even after a 49 percent gain since 2011. Credit growth and increasing profits will help Siemens AG and Cie. de Saint-Gobain SA spur a 17 percent jump in the region’s stocks, according to Deutsche Bank AG’s Gareth Evans.
The average estimate is the most bullish since at least 2010, with no strategist predicting a gain of less than 3.3 percent, and comes even as company analysts reduced income forecasts for an 85th straight week. While more than 2.7 trillion euros ($3.7 trillion) has been restored to European equity values since September 2011, shares would have to gain another 65 percent to match the advance in the Standard & Poor’s 500 Index during the last five years.
“You would have lacked credibility being bullish on Europe 18 months ago, although stocks were very cheap and the economy was bottoming,” said Paul Jackson, a strategist at Societe Generale SA in London, who predicts a 15 percent jump for the Stoxx 600 next year. “As soon as the market started to do well, suddenly everybody wants to listen. And now not only is everybody listening, but everyone is saying the same thing. The time to worry about the Armageddon scenario is gone.”
Investors have poured money into European mutual funds after shunning the region in 2010 and 2011 as mushrooming public debts threatened to break apart the euro bloc. The Euro Stoxx 50 Index (SX5E) lost 35 percent between February and September in 2011 as government-bond yields in Spain and Italy rose above 6 percent. Stocks in the index of euro-area companies gained or fell an average of 1.3 percent a day in 2011, according to data compiled by Bloomberg.
The swings narrowed to 0.8 percent in 2013 after European Central Bank President Mario Draghi vowed 17 months ago to do whatever is needed to defend the euro. More than 40 percent of fund managers surveyed this month by Bank of America Corp.’s Merrill Lynch said they are overweight euro-area equities, or own a greater proportion than are specified in global indexes, the highest for any of five regions.
Rising earnings and Draghi’s pledge pushed the Stoxx 600 up 49 percent from a two-year low in September 2011 to 321.14 at the end of last week, leaving it 20 percent away from the nearly seven-year high of 400.31 reached in June 2007. Companies in the gauge have a market value of about 8.2 trillion euros, up from a low of 5.4 trillion euros in September 2011. The capitalization peaked at 9.3 trillion euros in June 2007.
“There’s still a lot more to come from European equities next year,” Barclays’s Scott said in an interview on Dec. 19. “Although equity prices have been a lot lower than they are at the moment, we’re still at a pretty depressed point in stock valuations relative to where fundamentals are.”
Gains in industries from automakers to banks and media companies pushed the Stoxx 600’s price to about 13 times 2014 earnings, close to its highest valuation since data compiled by Bloomberg started in 2005. The index rose 3.7 percent last week as the Federal Reserve’s decision to slow the pace of its bond purchases boosted investor confidence in the U.S. economic recovery. The Euro Stoxx 50 increased 4.4 percent. The Stoxx 600 and the Euro Stoxx 50 climbed 0.7 percent each today.
Draghi’s pledge to protect the euro has underpinned a recovery in manufacturing (PMITMEZ) and helped end the region’s longest-ever recession. Since taking over at the ECB in November 2011, he has reduced interest rates to a record and said borrowing costs would remain low for an extended period. The policy comes as U.S. Fed Chairman Ben S. Bernanke begins the process of unwinding stimulus in America.
Manufacturing in the 17-nation currency bloc rose at a faster pace than economists had forecast this month, led by Germany. A factory-output index climbed to 52.7, a 31-month high, according to a survey of purchasing managers by London-based Markit Economics. The gauge in July increased above 50, the level indicating growth, for the first time in two years.
Economists forecast the euro area will expand 1 percent next year after contracting 0.4 percent in 2013, the median estimate in a Bloomberg survey shows. That would be the first year of growth since 2011.
Bond investors are finding shelter in Europe as they seek to avoid the first successive losses on Treasuries in at least 35 years. Yield forecasts for Spain and Italy, where borrowing costs soared to more than decade highs during the European debt crisis, indicate this year’s bond returns of as much as 11 percent will extend into 2014.
In the U.S., yields on 10-year government debt will rise more than a half-percentage point next year to 3.35 percent, which would result in a loss of 1.5 percent, estimates compiled by Bloomberg show.
Strategists’ projections for European stocks in 2014 are almost twice as high as a year ago. They estimated gains of 9.4 percent for 2012 and 11 percent for 2011, Bloomberg News surveys showed. The Stoxx 600 rose 14 percent in 2012 and fell 11 percent the previous year. Six of the 18 analysts estimate gains will top or match this year’s 15 percent advance.
Scott at Barclays in London has the highest projection in the survey. He says shares are “significantly underpriced” because investors are resistant to taking on risk. Barclays projected a 7.3 percent gain for 2013 at the end of last year.
UniCredit SpA’s Tammo Greetfeld is the most cautious in the poll, estimating the Euro Stoxx 50 will climb 3.3 percent next year. The brokerage had the least bullish call in the survey for 2011 too, projecting shares would rise 2 percent, when the Euro Stoxx 50 slumped 17 percent. In April, UniCredit said stocks would be little changed. The gauge of euro-area shares is heading for its biggest annual jump since 2009.
Annual profit forecasts in the Stoxx 600 have fallen every year since 2011, according to data compiled by Bloomberg. Analysts say European earnings will grow by 8.3 percent in 2013, down from 21 percent at the start of the year. Profit at Stoxx 600 companies will increase 11 percent to 24.14 euros a share in 2014, estimates compiled by Bloomberg show. The projections are about 18 percent below peak earnings in 2007.
“It’s imperative that earnings growth does come through,” Graham Secker, a strategist at Morgan Stanley in London, said at a presentation on Dec. 2. He expects stocks to rise 12 percent through the end of next year. “It would otherwise be a big ask for the market to see more multiple expansion.”
Analysts have downgraded earnings estimates on European companies excluding the U.K. for 85 weeks, a record streak, according to Citigroup Inc. data on Bloomberg. Mark Burgess, chief investment officer at Threadneedle Asset Management Ltd., says European earnings will probably disappoint again.
“The region remains beset by relatively poor growth dynamics compared with the rest of the developed world,” Burgess, who helps oversee $140 billion from London, said in e-mailed comments on Dec. 11. “This year’s stock market recovery could easily herald a false dawn. While for the first time in three years we believe Europe is likely to return to positive GDP growth in 2014, earnings growth is likely to be steady rather than dramatic.”
Even if gross domestic product estimates proved too high, Europe is the region that is likely to produce the best returns, Harris Associates LP’s Rob Taylor says. The 103 percent increase in the Stoxx 600 since its 12-year low in March 2009 compares with a 169 percent jump in the S&P 500.
“Where we are finding the best value right now is in Europe because people continue to be pessimistic about the outlook for growth and earnings,” Chicago-based Taylor, whose Oakmark Global Fund (OAKGX) has beaten 93 percent of its competitors this year, said in a phone interview. “We are aware of all those things from a macro perspective, but we are investing in businesses and not in governments or GDP.”
Evans at Deutsche Bank says his team at Europe’s largest bank has become “increasingly convinced” that lending in the region will rebound and will help companies beat estimates in what he calls investors’ “complete loss of confidence in the earnings cycle.”
The ECB said in a quarterly survey released Oct. 30 that banks expect to relax standards on corporate lending this quarter. That’s the first such response since the fourth quarter of 2009 and, if it occurs, would mark the first easing of conditions since the second quarter of 2007. Lenders also plan to simplify access to consumer loans and mortgages, and predicted a rise in loan demand.
Siemens, based in Munich, will boost earnings by 49 percent in the two years through 2015, according to the average analyst projection compiled by Bloomberg. Profit at France’s Saint-Gobain (SGO) will grow 72 percent, reversing a 40 percent slump in 2012, the projections show.
Shares of Siemens, Europe’s largest engineering company, are 9 percent below their high in July 2007. Saint-Gobain, the region’s biggest supplier of building materials, has lost 49 percent of its value since a record that month. Both stocks have gained more than 42 percent since the Stoxx 600 reached its two-year low on Sept. 22, 2011.
“One can often be forgiven for not participating in the first stage of a recovery, given the uncertainties in the euro area,” London-based Evans and his colleague Thomas Pearce wrote in a 2014 outlook report on Nov. 29. Deutsche Bank forecast gains of 13 percent for 2013 at the end of last year. “That excuse is going to become less and less available to investors as the euro-area recovery begins to look more enduring.”
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