casper
11-22-2009, 01:56 PM
Growth, valuation to keep Europe share rally alive
By Atul Prakash - Analysis
LONDON - European equities have a lot more ammunition to fire in 2010 even after an eight-month bull run to new highs, as improving economic data and impressive earnings in the third quarter tempt investors to grab risky assets.
A global economic recovery following the worst financial crisis since the Great Depression of the 1930s raises the risk of an earlier-than-expected withdrawal of trillions of dollars of stimulus packages by governments and central banks across the world, which could be a serious setback for the markets.
But most analysts say that such a situation could only arise after the first half of 2010 and until then European shares could enjoy an easy ride after already surging 60 percent since a lifetime low in early March to a 13-month high this week.
The FTSEurofirst 300 index .FTEU3 of top European shares is still down 37 percent from a multi-year peak in 2007, giving scope for further gains in the coming months, analysts said. On valuation grounds also, the market remains quite attractive.
"We think concerns about an impending end of the positive impulses are, however, premature and still consider the setback potential for the equity markets limited, also because the valuation has remained moderate," said Gerhard Schwarz, head of global equity strategy at UniCredit in Munich.
"A sustained increase in volatilities is still not in the cards. In fact, the apparently still very guarded sentiment continues to create scope for positive surprises, for example on the development of dividends," Schwarz said.
In terms of price-to-earnings ratio, shares in the DJ STOXX 600 .STOXX index trade at around 13 times one year forward earnings, against a 2004 peak of 14 times and a five-year average of 13.5 times, analysts said.
UniCredit is overweight insurance, technology and travel & leisure sectors, but underweight banks, food & beverages and retail.
Analysts said insurers looked cheap, but they remained skeptical on the ability of banks to keep rising after a 168 percent surge from March lows. The possibility of higher capital requirement of banks could also put pressure on the sector.
"We remain confident and positive," said Anko Beldsnijder, managing director of MainFirst Asset Management. "We have a feeling that investors are still underweight equities. Demand for equities will drive prices higher."
IMPROVING DATA, EARNINGS
The optimism also emanated from an improved economic picture, with industrial output rebounding and GDP growth coming back into positive territory in many countries, analyst said.
The Blue Chip Economic Indicators newsletter for November found forecasters had raised their 2010 projections for U.S. GDP for a fourth straight month. It said the economy should expand 2.7 percent next year, marking an upward revision from the 2.5 percent pace expected a month ago.
Latest figures showed British manufacturing output rose faster than expected in September, and at its fastest monthly pace since July 2002, rebounding from August's sharp drop.
"Companies have adapted very well to a lower demand environment and they are leaner and meaner now. If we go through a period of economic growth, that should put them in a strong position," said Henk Potts, strategist at Barclays Wealth.
By Atul Prakash - Analysis
LONDON - European equities have a lot more ammunition to fire in 2010 even after an eight-month bull run to new highs, as improving economic data and impressive earnings in the third quarter tempt investors to grab risky assets.
A global economic recovery following the worst financial crisis since the Great Depression of the 1930s raises the risk of an earlier-than-expected withdrawal of trillions of dollars of stimulus packages by governments and central banks across the world, which could be a serious setback for the markets.
But most analysts say that such a situation could only arise after the first half of 2010 and until then European shares could enjoy an easy ride after already surging 60 percent since a lifetime low in early March to a 13-month high this week.
The FTSEurofirst 300 index .FTEU3 of top European shares is still down 37 percent from a multi-year peak in 2007, giving scope for further gains in the coming months, analysts said. On valuation grounds also, the market remains quite attractive.
"We think concerns about an impending end of the positive impulses are, however, premature and still consider the setback potential for the equity markets limited, also because the valuation has remained moderate," said Gerhard Schwarz, head of global equity strategy at UniCredit in Munich.
"A sustained increase in volatilities is still not in the cards. In fact, the apparently still very guarded sentiment continues to create scope for positive surprises, for example on the development of dividends," Schwarz said.
In terms of price-to-earnings ratio, shares in the DJ STOXX 600 .STOXX index trade at around 13 times one year forward earnings, against a 2004 peak of 14 times and a five-year average of 13.5 times, analysts said.
UniCredit is overweight insurance, technology and travel & leisure sectors, but underweight banks, food & beverages and retail.
Analysts said insurers looked cheap, but they remained skeptical on the ability of banks to keep rising after a 168 percent surge from March lows. The possibility of higher capital requirement of banks could also put pressure on the sector.
"We remain confident and positive," said Anko Beldsnijder, managing director of MainFirst Asset Management. "We have a feeling that investors are still underweight equities. Demand for equities will drive prices higher."
IMPROVING DATA, EARNINGS
The optimism also emanated from an improved economic picture, with industrial output rebounding and GDP growth coming back into positive territory in many countries, analyst said.
The Blue Chip Economic Indicators newsletter for November found forecasters had raised their 2010 projections for U.S. GDP for a fourth straight month. It said the economy should expand 2.7 percent next year, marking an upward revision from the 2.5 percent pace expected a month ago.
Latest figures showed British manufacturing output rose faster than expected in September, and at its fastest monthly pace since July 2002, rebounding from August's sharp drop.
"Companies have adapted very well to a lower demand environment and they are leaner and meaner now. If we go through a period of economic growth, that should put them in a strong position," said Henk Potts, strategist at Barclays Wealth.