Things may not be so bad for European shares after all.
That’s the message that strategists are sending this month. For the first time since Bloomberg began compiling 2016 targets last year, forecasters have increased their estimates for the level at which the Stoxx Europe 600 Index will end in December. They now see the gauge reach 346, according to the average of 10 projections compiled by Bloomberg, up from 334 last month. In its second day of gains, the measure is hovering around that level, propelled by the Federal Reserve’s dovish stance.
Reassurances that central-bank largesse will keep supporting growth have helped revive a rally that stumbled in the past two weeks. The Bank of Japan on Wednesday shifted the focus of its stimulus from expanding the money supply to controlling interest rates, while the Fed trimmed its projection for hikes next year to two from three. Continued global support is good news for Europe, where economic data are back to missing forecasts. Now the Stoxx 600 is up 1.2%, heading for its biggest weekly rise in two months. It’s still down more than 5% this year.
“Things are better, but not great,” said Charles de Boissezon, co-head of European equity strategy at Societe Generale SA in Paris. “Central banks are still trying to minimise the shocks in the market. The economic momentum is OK, fears of deflation have receded, and we see some signs of easing fiscal policy. Some concerns are receding, but there are still fears on the horizon.”
The average year-end forecast still implies a more than 5% decline in the Stoxx 600 this year, which would be its first since the height of the sovereign-debt crisis. Last month, strategists expected a 8.6% slump. For Germany’s DAX Index, the average estimate rose to 10,554 – which would mean just a 1.8% slide for 2016 – from 9,988 in August.
Concerns about the efficacy of European Central Bank stimulus, paired with a banking crisis in Italy, the UK vote to leave the European Union and political tensions from Spain to German have driven away bulls that poured record money into the region’s funds in 2015. Now they’re backing off like never before, with a Bank of America Corp report last week showing 32 straight weeks of withdrawals.
Yet the extreme pessimism that sent the Stoxx 600 down as much as 17% in February has eased. Since the low that followed the British referendum in June, the gauge has rebounded 12% and analysts have begun tempering their bearish profit outlook for its members after 15 consecutive months of downgrades. With a valuation of about 15 times estimated earnings, European shares are cheaper than those in the S&P 500 Index or the MSCI All-Country World Index, data compiled by Bloomberg show.
“The good thing about Europe is that it’s not that expensive and it has the possibility of earnings delivering more than expectations,” said Pierre Mouton, who helps oversee about $8.5bn as a fund manager at Notz, Stucki & Cie. in Geneva. “The strategists are probably getting less pessimistic, with a good chunk of bad news already behind us. There are good companies out there. ”
On Thursday, all Stoxx 600 industry groups increased, and every western-European market advanced. Commodity producers headed for their biggest jump in more than two months, with Rio Tinto Group and BHP Billiton up more than 3.3%, while energy shares climbed with oil after data showed US stockpiles dropped to the lowest since February. Automakers, set for their largest rally in six week, helped push the DAX up for a fourth day. The index added 1.7% for the region’s biggest gains, with Deutsche Bank AG rising 2% from near a record low.
Among companies moving on corporate news, Swedish maker of biometric sensors Fingerprint Cards AB advanced 4.8% after a report that a Chinese company approached it this summer about a potential merger.