European Stocks Rally for Third Day as Defensives Stage Comeback

(Bloomberg) -- European equities rose for a third day, though a recent rally across value stocks lost steam as investors bought back into more defensive areas of the market.

The Stoxx 600 Index advanced 1.1% by the close in London, jumping to its highest level since February. Real estate, utilities and health care paced the gains while banking and construction stocks lagged, marking a reversal of the rotation into value shares.

European stocks have been on a tear since Monday as positive news around the development of a coronavirus vaccine spurred a rotation into the struggling parts of the market that had been weighed down by the lockdowns and economic woes. The benchmark index also extended gains today after the European Central Bank President Christine Lagarde said policy makers will focus on emergency bond purchases and long-term loans for their next wave of stimulus.

While the rotation into value stocks took a pause on Wednesday, Goldman Sachs Group Inc. strategists led by Sharon Bell expect it to last longer than a historical four-month average, thanks to a strong recovery and an “extreme” gap in valuations.

“The scale of the bounce-back was probably always going to be a bit bigger than reality necessarily justified, so after a couple of days of that, I don’t think it’s a huge surprise you get a little bit of a pause for thought,” Ian Williams, a strategist at Peel Hunt, said by phone.

The rotation into cheaper value shares could drive gains in European stocks relative to the U.S., according to strategists at JPMorgan Chase & Co. They forecast an outperformance of up to 5% for the Euro Stoxx 50 by December as the European benchmark has a much higher presence of cyclical and value stocks compared with the S&P 500.

Some of Wednesday’s biggest decliners in Europe, such as mall owner Unibail-Rodamco-Westfield and aerospace company Rolls-Royce Holdings Plc, are among the week’s top performers after investors snapped up stocks whose businesses have been hit by lockdowns and travel restrictions.

Yet, certain stocks “are still vulnerable to the fact that we are in lockdown, most of Europe is facing new restrictions, and are those going to be removed that quickly even if the vaccine does make progress?” said Peel Hunt’s Williams.

The FTSE 100 advanced 1.4% as the pound weakened after a report that the U.K. and European Union are likely to miss their mid-November deadline for a post-Brexit deal.

Among other big movers, German IT supplier Bechtle AG soared 13% after hiking its earnings forecast, while ABN Amro Bank NV weighed on the banking gauge after the Dutch lender provided a cautious outlook in its results.

©2020 Bloomberg L.P.