The Best Days May Be Over for Europe’s Equity Rally This Year

(Bloomberg) -- European equities are stuck near the same levels they were at two months ago, and if strategists are to be believed, that rut may drag on into the year-end.

Equity strategists surveyed by Bloomberg on average expect the Stoxx Europe 600 to end 2020 at a level of 370, leaving little upside for European shares as of Tuesday’s close. They forecast a year-end level of 3,192 for the euro-area gauge Euro Stoxx 50, implying about 3% downside.

After recouping more than half their pandemic-fueled losses in just three months, European stocks have stalled amid rising Covid-19 infection rates across the globe and renewed tensions between the U.S. and China.

“I expect a volatile, broad sideways movement in the next few months,” Unicredit SpA strategist Christian Stocker said. “There is not one single risk currently, but a mixture of different risks or uncertainties such as simmering tensions between the U.S. and China, a renewed accelerating Covid-19 spread in Europe, (and) this goes hand in hand with high uncertainty about the speed of economic recovery and, therefore, company earnings,” he added.

Although strategists see stocks going nowhere in Europe, globally, investors are turning more optimistic. Fund managers in Bank of America Corp.’s August survey were bullish on equities, no longer viewing gains as a bear market rally, but expecting higher growth, profits and inflation. The euro area is now the most preferred region globally, with allocation at a net 33% overweight, the highest since May 2018, according to BofA’s survey.

“We think this macro recovery has further to go,” Bank of America strategist Sebastian Raedler said, adding that he expects both global and euro-area PMIs to rise by a further 5 points before peaking late in the third quarter or early in the fourth quarter. This implies a “further 15% upside for European equities,” said the strategist, who sees the Stoxx 600 at 410 by year-end.

According to Raedler, the biggest risk for markets would be the derailing of the macroeconomic recovery that could be caused by U.S. lawmakers failing to pass further fiscal stimulus, as well as renewed lockdowns in response to spikes in Covid-19 cases. The Stoxx 600 rose 0.2% to 367.94 as of 9:26 a.m. on Wednesday.

For the DAX Index in Germany, Europe’s growth engine, strategists predict a year-end level of 12,246, suggesting a drop of about 5% from Tuesday’s close. The benchmark has rallied more than 50% since its March lows, outperforming the broader European market and even the S&P 500 Index.

The U.K.’s FTSE 100 Index, on the other hand, has lagged behind the wider recovery amid Brexit worries and a heavy weighting of value shares. It’s predicted to finish 2020 at 6,293 on average, implying a gain of about 3.5%.

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.