Reuters/Paris

European stocks will extend their rally into the second half of the year, fuelled mostly by the European Central Bank’s (ECB) recent stimulus measures, a Reuters poll showed.

Italy’s benchmark index FTSE MIB is expected to be the biggest beneficiary of the ECB’s latest action, set to gain 7% before the year-end.

Milan’s index - including shares in Telecom Italia, UniCredit and Fiat - has surged 13% this year, far outpacing the overall European market.

The poll of over 60 fund managers and strategists taken in the past week predicted the pan-European STOXX Europe 600 index would climb 5% to 360 points by the end of 2014 - a seven-year high.

The eurozone’s blue-chip Euro STOXX 50 index is expected to rise 4.5%.

The rally was expected to extend into next year, with the STOXX 600 set to hit 373 points by the middle of 2015, and the Euro STOXX 50 reaching 3,500 points by that time.

“The main factor will be the support from the central bank,” said Intesa Sanpaolo chief economist Gregorio de Felice, who puts the STOXX 600 at 367 at the end of 2014.

“In this context, ample liquidity as well as the lack of attractive alternative investments play in favour of risky assets such as stocks.”

This month, the ECB cut interest rates - the deposit rate to -0.1% and the main refinancing rate to 0.15% - and launched a series of measures to pump more money into the financial system to fight off the risk of Japan-like deflation.

While 10-year German Bunds offer a yield of 1.3%, investors are increasingly reallocating assets into European equities, which offer on average a dividend yield of 3.3%.

Investment flows into the region’s stocks have been brisk this year, with significant flows into peripheral markets such as Italy. This has helped keep the euro, trading near $1.36, strong.

Despite Italian stocks’ outperformance, Milan’s MIB index still needs to double to go back to pre-crisis levels of 2007, while the STOXX 600 index is less than 20% below 2007 peaks and Germany’s DAX trades at a record high, about 17% above 2007 levels.

Italian shares remained among the cheapest in Europe, trading at 1.14 times book price, well below 1.85 times for European shares overall, according to Thomson Reuters Datastream.

“We think that Southern Europe’s catch-up rally still has legs,” said Christian Jimenez, fund manager and president of Diamant Bleu Gestion.

Ongoing reforms in a number of eurozone countries should also support stocks in the coming months, Societe Generale’s head of European equity strategy, Roland Kaloyan, said.

“Within the euro area, we expect the French CAC 40 and the Italian MIB to strongly deliver over the next 12 months as structural reforms should accelerate,” said Kaloyan, who sees the STOXX 600 at 340 points by end-2014.

He expects France and Italy to outperform Spain’s IBEX , which he says “is already pricing in a lot of good news”.

The latest Reuters poll sees the CAC ending 2014 at 4,700 points, up 5% from Wednesday’s close, with the IBEX at 11,500 points, also up 5% from Wednesday.

Germany’s DAX - which has underperformed so far this year, hurt in part by worries over the exposure of German exporters to emerging markets - is forecast to end 2014 at 10,250 points, up 4% from where it is now.

A long-awaited recovery in corporate profits will also support European shares in the next six to 12 months, strategists and fund managers said.

Investors have had high hopes of a pick-up in earnings this year, but a strong euro has hit the margins of a number of European exporters. That has triggered a raft of profit warnings, while the latest ECB measures have failed to pull down the single currency.

Most strategists and fund managers are still betting on an earnings recovery.

“An improvement in the profit outlook is precisely what the market needs most at the moment,” said Mathieu L’Hoir, strategist at AXA Investment Managers, which has €562bn ($766bn) under management.

According to data from Thomson Reuters Datastream, profits for companies listed on the STOXX 600 index are expected to rise by 7.5% in 2014.