European shares look set to build on 2-1/2 year highs next week, fuelled by a heady cocktail of share buybacks, steady corporate profit growth and M&A activity. Banks will feature strongly among the companies lining up to present their results. Standard Chartered, Credit Suisse, ING and Commerzbank are among those due to report figures. In a second heavy week of European earnings investors will draw lessons from the vanguard of companies.
"The results so far have been nothing to worry about. Pricing power seems to be returning to various sectors of the economy, particularly industrials," said Ian Richards, European equity strategist at ABN AMRO.
Results from French oil major Total will be a focus, following bumper profits from BP Plc and Royal Dutch/Shell.
Many major oil companies have recorded record profits in the last year thanks to the highly opportune operating environment. They have also handed back cash to shareholders, a growing trend among European companies.
"By-and-large we have seen firms posting strong profits and generating cash," said John Hatherly, head of global analysis at M&G Asset Management.
"There is a lively debate over the best use of these funds. Should firms return the cash to shareholders through dividends or buy-backs; invest it their own operations or buy new assets? Some companies try to do all these things."
Other blue-chip companies presenting earnings include: leading Spanish power utility Endesa, the world's biggest cosmetics group L'Oreal, Europe's largest carmaker Volkswagen and Telenor, Norway's biggest telecoms group.
A flurry of merger activity among mid-cap British stocks over recent weeks has driven prices higher and encouraged fund managers to reinvest in equities.
"Fund managers are reasonably confident about recycling the cash from dividends back into the market.
Also companies are buying back their own shares so there is plenty of fire-power in the market to push European equities above their 2-1/2 year highs," said M&G's Hatherly.
So far, M&A deals have been much smaller and less numerous than in the States but this could change given the increasing size and aggression of private equity firms.
"A lift-off in European M&A would probably be led by private equity firms.
Their cost of refinancing in the debt market is very low which gives them a distinct advantage versus corporates," said ABN AMRO's Richards.
"The valuation ratios they are paying are high compared to historic standards, so this will help push prices higher.
There is also pressure among private equity funds to do deals which will sustain stock market gains.
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