Europe’s Equity Rally Faces Reckoning as Strategists See Losses

(Bloomberg) -- Analysts are pouring cold water on the bullishness that has pushed European equities to a one-month high, predicting the market will finish the year lower on concerns about the virus and geopolitical tensions.

Strategists surveyed by Bloomberg on average expect the Euro Stoxx 50 Index to end 2020 at a level of 3,192, implying a drop of 5.5% from Wednesday’s close. They forecast that the broader Stoxx Europe 600 Index will end the year at 369 points, suggesting a 1.3% fall.

Renewed worries over a rise in virus cases globally and reignited U.S.-China tensions are prompting questions about the tenacity of the rally that has seen the Euro Stoxx 50 surge more than 40% since hitting March lows. While the rebound has lost some steam after sharp gains through the start of June, the benchmark rose to a five-week high on Wednesday on the optimism over progress in a vaccine to fight the infection.

Market participants have been more enthusiastic about European stocks in the past month, thanks to unprecedented stimulus measures and optimism about an economic recovery as lockdowns ease. BlackRock Inc., the world’s largest asset manager, upgraded European equities to overweight recently, joining Goldman Sachs Group Inc., Morgan Stanley, Bank of America Corp. and Eaton Vance in turning more optimistic on the region.

Institutional investors who mostly stayed on the sidelines in the early phase of the rebound are getting in just as strategists are turning cautious. Allocation to euro-zone stocks increased 9 percentage points to net 16% overweight in the July fund manager survey by Bank of America Corp., the largest increase in weighting of any region this month.

Forecasters see Germany’s DAX Index ending the year at the level of 12,132, suggesting a drop of 6.2% from Wednesday’s close. The U.K.’s FTSE 100 Index, which has lagged the broader market rally amid Brexit worries and a heavy weighting of value shares, is predicted to finish 2020 at 6,262 on average, implying a decline of just 0.5%.

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