Volatile Year-End May Put a Cap on European Equity Gains

European equities may not catch a break from being stuck in neutral as they head into a volatile end of the year, according to strategists surveyed by Bloomberg.

The Stoxx Europe 600 Index will end the year at 371 points, leaving just 1% upside against yesterday’s close, based on the average of 18 strategists polled in the study. They forecast a year-end level of 3,295 for the euro-area gauge Euro Stoxx 50, similarly leaving little room for progress.

Investors face a cocktail of risks in the final months of a volatile year, from a resurgence in Covid-19 cases across Europe to the U.S. election and Brexit talks. The uncertainty is reflected in the wide range of strategist forecasts, with JPMorgan Chase & Co. predicting the Stoxx 600 will fall more than 9% by year-end, while Makor Capital Markets SA expects a 13% rise. Volatility and short-term hedging demand are on the rise, even as the Stoxx 600 has remained in a tight range since early June.

“We broadly expect equity markets to trade sideways in a wide range over the coming quarters, if not years,” says James Gutman, head of investment portfolios at Dolfin Financial. His year-end target of 340 implies a 7.2% drop for the Stoxx 600. “In the very near term we think markets could have a bit of a headache as the pain relief from subsidies and furloughs starts to wear off.”

Volatile Year-End May Put a Cap on European Equity Gains

Among notable changes since Bloomberg’s September survey, Cie. Financiere Tradition SA and Deutsche Bank AG cut their targets by around 9%, while Commerzbank AG increased its by 9%.

“The ‘recovery’ will not only be incomplete but also will stall,” said Stephane Ekolo, strategist at Tradition. “Even with all this stimulus, the global recession is unlikely to end as fast as anticipated by many market participants.”

Ekolo said the U.S. relief package is unlikely to come before the presidential election, while also noting a pending “Brexit mess,” and likely more bankruptcies and job losses. “Markets ought to decline,” he added.

The Stoxx 600 dropped 0.4% on Tuesday, trimming its October advance.

Most Overweight

Fund managers are still backing European stocks. Cash levels fell the fastest since 2003 to reach a two-year low in Bank of America Corp.’s October survey. Now at 4.1%, they are close to the “greed” threshold that BofA estimates at 4%. The euro area remained the most overweight region for equities globally, with allocation rising by four percentage points to a net 26%. U.K. equities retained the most underweight spot.

“The door is open for European stocks to perform well over the next three to six months,” said Societe Generale SA head of European equity strategy Rolan Kaloyan. “We’ll see what happens with Brexit and the U.S. vote,” he said, noting that positioning in European stocks is still very weak, compared with the U.S. “so there could be a rotation.”

He doesn’t see “a big trend for the year-end,” though, and has a 370 index target for the Stoxx 600, saying gains are limited by the uncertainty around the U.S. election, the resurgence in Covid-19 cases and Brexit.

Strategists predict a year-end level of 12,713 for Germany’s DAX Index, suggesting a drop of 1.1% from Monday’s close. The benchmark has rallied about 52% since its March low, outperforming both the Stoxx 600 and the S&P 500 Index.

The U.K.’s FTSE 100 Index, on the other hand, has lagged the wider recovery amid Brexit worries and a heavy weighting of value shares. It’s predicted to finish 2020 at 6,158 on average, implying a gain of about 4.6%.

For tables on the Euro Stoxx 50 and Stoxx 600 polls click here; for a table on the DAX poll click here, for a table on the FTSE 100 poll click here.

©2020 Bloomberg L.P.

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