European shares and bonds set to gain in 2005

European bonds and equities could benefit in 2005 as investors react to an increasingly weak regional economy and stay loyal to firms able to lift profits in a climate of sustained, if slowing, global growth. That is the view of strategists and fund managers who expect European blue chip shares to continue grinding higher next year, in spite of the weak dollar and irrespective of the oil price.
"It hasn't been a bad year for equities and there's no reason to suggest we shouldn't see more of the same in 2005," said Michael Taylor, head of equities at fund firm Threadneedle Investment.
Government bond yields are likely to hold near current depressed levels or fall further because inflation will stay under wraps and the upside for interest rates is limited, they added.
Bond yields and prices move inversely to one another.
"We expect European equities to grow in line with earnings growth of about 9 percent plus expected dividends, which would mean an overall return for the year of about 10 or 11 percent," Rolf Elgeti, a strategist at ABN Amro said.
Yields on benchmark 10-year euro zone bonds are near 17-month lows at around 3.76 percent, having sunk by more than half a percentage point since the end of June.
The FTSEurofirst 300 index of leading European shares, meanwhile, is knocking against 29-month highs and is up more than 8 percent so far this year.
Dollar-based investors have had the most to cheer due to the currency kickback from appreciating European currencies.
Non-resident investors seem confident that that will continue, having recently shifted more money into the region.
European Central Bank data this week showed net inflows of portfolio investment of 39.6 billion euros in September after an average monthly outflow of 1.8 billion in the previous six months and an inflow of 6.3 billion in August.
European markets, even so, are walking a domestic tightrope because the euro zone economy is generating little growth of its own and is struggling to feed off growth elsewhere as currency gains chip away at the external competitiveness of companies.