European stocks stuck at peak as recovery uplift fades

European stocks look set to hold around or inch just above current record levels as the initial boost stemming from the region’s V-shaped recovery after the COVID-19 downturn loses momentum, a Reuters poll found.

The Reuters poll of 16 fund managers, strategists and brokers surveyed over the past two weeks predicted the STOXX 600 (.STOXX) would reach 451 points by year end, just 1.3% above Monday’s close.

Supported by massive stimulus and vaccination campaigns, the pan-European index has already risen 11.5% this year, as investors rushed to price in the region’s catch-up potential.

European corporates are still set for more quarters of double-digit profit growth, as economies reopen and Brussels pumps more support through its huge post-pandemic recovery fund.

That should shield European equities from possible pull-backs even as investors start to ponder risks that inflation could lead to a tightening of monetary policy conditions, especially in the United States.

“The positive tailwinds should continue with activities normalizing and economies growing again,” said Tomas Hildebrandt, portfolio manager at Evli Bank in Helsinki, stressing the importance of the EU recovery fund.

“Its success is definitely crucial, as well as keeping new Covid variants and infections at bay. Nevertheless, the current positive drivers will fade with time,” he added.

With most of the results accounted for, European profits are expected to have surged a whopping 93% in the first quarter, according to the latest Refinitiv I/B/E/S data which point to a similar performance in the second quarter.

Euro zone business growth accelerated in May at its fastest pace in over three years with the IHS Markit flash Composite Purchasing Managers’ Index, a gauge of economic health, climbing to 56.9, well above the 50 mark separating growth from contraction. read more

A deal to open up tourism across the European Union this summer should also provide a boost to tourism-dependent economies that were hammered by restrictions last year.

“The key is seeing reopening progress across Europe combined with global COVID-19 improvement,” said Chris Bailey, European strategist at Raymond James.

But for analysts such as Marco Vailati, head of research and investments at Cassa Lombarda in Milan, the momentum is fading and the economic environment is probably as good as it gets.

“As the year progresses, it will be increasingly difficult for the macro trend to surprise positively with the same intensity,” said Vailati, who sees the STOXX retreating slightly to 430 points by year end.

European stocks have so far this year outperformed the MSCI’s global stock index (.MIWD00000PUS), which is up approaching 10% year to date.

Among the factors backing European indexes is the fact they are cheaper than their global peers and are heavy in banks and other cyclical stocks which benefit when the economy looks up.

They are also light on tech and growth stocks for which investors are reluctant to pay hefty premiums amid buoyant economic activity and rising interest rates.

According to the poll, the UK’s top FTSE 100 (.FTSE) share index is expected to reach 7,250 points at the end of the year against Monday’s close of 7,051.59.

France’s CAC 40 (.FCHI) is expected to rise to 6,500 points from its current 6,410 points level, while Italy’s FTSE MIB (.FTMIB) and Spain’s IBEX (.IBEX) are seen making slightly higher gains of over 3% before the end of the year.

Germany’s industrials-heavy DAX index (.GDAXI) should gain about 1.7% to 15,700 points.

Our Standards: The Thomson Reuters Trust Principles.

Source: https://www.reuters.com/business/finance/european-stocks-stuck-peak-recovery-uplift-fades-2021-05-26/