Wild 2020 Ride May Turn to Gains for Europe Stocks Next Year

(Bloomberg) -- 2020 will go down as one of the most dramatic years in European stock market history. The expert view for 2021: don’t expect any more fireworks.

The average forecast from strategists is that the Stoxx Europe 600 Index will climb 6.6% from Wednesday’s close. After a year that’s seen the index plummet 36% in just a few weeks and then claw back most of those losses, it’s an outlook that seems downright undramatic.

But it also points to a belief among investors that there are more gains ahead, though the rally will be restrained by Europe’s staid economic growth. The consensus year-end estimate for the Stoxx 600 is 421, and for the Euro Stoxx 50 to finish at 3,774 -- still below their pre-pandemic highs.

“We are not bearish, but cautious,” said Simon Wiersma, an investment manager at ING Bank NV’s wealth management unit. “We see very little upside room left for equities globally.”

While investors have started pricing in a potential return to normalcy since November’s positive vaccine updates, the European Central Bank on Thursday poured some cold water on the optimism, lowering its forecasts for 2021 economic growth for the euro zone.

Roland Kaloyan, Societe Generale SA’s equity strategist, says the rotation into cyclical stocks will continue, but it’s worth avoiding names that are now priced to perfection. He recommended shares related to government spending, such as green, digital and traditional infrastructure, rather than consumer-oriented sectors.

The main market risks are in rising bond yields and a stronger euro, he said, suggesting that investors hedge through insurance stocks and euro-area small caps.

Although the tradition of year-ahead strategist forecasts is useful to some as a temperature check, this year’s turmoil would have been impossible to predict. Still, market experts weren’t too far off in their calls -- the average forecast last December was for the Stoxx 600 to end 2020 at 415, or about 20 points above Wednesday’s close.

For 2021, it’s notable that market experts are holding firm to bullish views and betting that there’s room to extend the record November advance. There are good reasons for why prognosticators say markets can keep moving higher, from the vaccine rollout to easy money policies.

“In 2021, equities are likely to be caught between high valuation and the lack of investment alternatives,” Helaba strategists led by Chief Economist Gertrud Traud wrote in a note. “Until effective vaccines are available, stocks will remain dependent on support from monetary and fiscal policy.”

Analysts also expect gains in German and U.K. equities, even as the latter’s fortunes hang on the outcome of Brexit talks. They predict on average that the DAX Index will end 2021 at 14,301, or 7.2% above Wednesday’s close, while seeing the FTSE 100 finishing at 7,028, implying a 7.1% advance.

Central banks will limit the downside, but upside will also be capped, according to Citigroup Inc. strategists led by Robert Buckland, who see 4% gains next year. They say 2021 will be a year of continuous rotation into value sectors, while the focus on ESG and deal activity will increase. The bank’s proprietary market signal still recommends to “buy the dips.”

Another bullish dynamic for markets may be equity supply and demand, which will likely improve to the tune of $1.1 trillion next year, JPMorgan Chase & Co. strategists led by Nikolaos Panigirtzoglou wrote in a note this week.

“There is dry powder left,” said Barclays Plc strategist Emmanuel Cau in his 2021 outlook report. “The unwind of the two-year-long flight to safety might just be starting.”

©2020 Bloomberg L.P.