Strategists can’t believe the European equity rally will keep going.
According to the average response in a Bloomberg poll, the Stoxx Europe 600 Index is likely to fall 8.9% from Wednesday’s close, to 355 points, by the end of 2019. The Euro Stoxx 50 Index, home of the euro-area’s biggest companies, is seen retreating 6.4% from current levels, to 3,255, the survey shows.
The region’s equities are being torn between conflicting signals: optimism over global growth has helped boost the value of the Stoxx 600 by about $1.7tn from its December lows, while outflows from European equity funds continue almost non-stop.
Although Europe’s corporate profit outlook has been beating that of global firms, the latest Bank of America Merrill Lynch fund manager survey shows that being short the region’s stocks continues to be the most popular trade globally.
Analysts remain on edge as European economic data disappoints. PMI figures showed yesterday the euro area slid deeper into economic misery at the start of the second quarter, with weakness in manufacturing spilling over into services. The threat of US tariffs lingers and Brexit’s delay means more political uncertainty. More and more forecasters are comparing Europe to Japan due to record-low rates, negative bond yields, sluggish economic growth, and an ageing population.
Another major source of concern is the German economy, which this year is predicted to see the weakest expansion in six years. Based on European Commission forecasts for the rest of the euro area, the government’s latest prediction would leave Germany as the region’s worst performer this year, bar Italy, which is stagnating. Despite these woes, the DAX Index is up 15% in 2019.
Still, some brokers, including Credit Suisse Group AG, manage to find attractive pockets in the region’s stocks and favour European cyclicals, which usually outperform when economic growth remains robust.
What could help keep European stocks on fire this year is the expectation that corporate earnings growth will beat that of the US. The Stoxx Europe 600 Index constituents’ profit is seen rising 4.8% this year compared with 4.4% for the S&P 500, according to Bloomberg data.
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