LONDON/MILAN: Optimism around vaccine developments and expectations of a strong bounce in corporate confidence and profitability will push European stocks to near record highs next year, as policymakers look set to keep stimulus flowing.
A Reuters poll of 26 fund managers, strategists and brokers surveyed over the past two weeks expects the STOXX 600 to climb to 430 points by the end of 2021, just a whisker below February's record highs, as economic activity returns to normal following the Covid-19 downturn.
That is a 10.6% rise from Monday's closing price. It also represents a 60% jump from the 268 points low hit in March when lockdowns imposed across the world to limit the pandemic's spread triggered a rush to safety across global markets.
Promising results from three major pharmaceutical companies on their vaccine trials encouraged a wave of optimism across global stock markets, with the latest poll signalling a dramatic change in expectation for the STOXX 600.
In the previous quarterly poll, the index was seen reaching only 375 points in December and 410 points a year later.
"European economies and markets have a lot to gain as the global outlook improves," said Tomas Hildebrandt, senior portfolio manager and strategist at Evli Bank in Helsinki.
"We expect the pandemic will be suppressed, that the relations between the US and China will ameliorate, boosting global trade and the global economic recovery will continue," he added, cautioning however that uncertainties remain significant.
Analysts said possible risks for European equities could arise from new lockdowns, a failure to reach a Brexit deal and delays in the European Union's policy response to ease the pandemic's economic damage.
Still the mood remains upbeat after promising trial results from AstraZeneca, Moderna and Pfizer this month raised the prospect of vaccine shots becoming available to large portion of Europe by early next year.
"Whist there are risks associated with the delivery of vaccination programmes globally, overall it looks like countries will be able to support a return to near-normal," said Neil Wilson, chief market analyst at Markets.com in London.
Since Pfizer's announcement on Nov. 9, the global economic outlook has continued to improve, with IHS Markit's euro zone composite PMI future output index jumping to 60.1 in November from 56.5 in October, its highest since February.
European shares have risen 14% so far in November and are on track for the best month ever, even though the current quarter will be tough for companies due to the resurgence of the pandemic.
The stocks most battered by Covid-19, from oil, banks to travel and leisure, have led the charge and are expected to remain favoured as investors shift away from the so-called pandemic darlings of large-cap tech shares.
Germany's industrials-heavy DAX index will gain over 10% from current levels by the end of next year, touching 14,500 points, not far from the record high it reached in February, according to the Reuters poll.
But there is more to it than vaccine only.
Expectations of more stimulus from the European Central Bank and the bloc's 1.8 trillion euro plan to recover from the recession will also offer support, along with expectations London and Brussels will clinch a last-minute Brexit trade deal.
Stimulus and Brexit will encourage "global investors to rebuild investments across Europe from more than just pandemic progress perspective", said Chris Bailey, European strategist at Raymond James in London.
According to the poll, the UK's top FTSE 100 share index is expected to reach 6,900 points by end 2021, up 8.9% from Monday's close. France's CAC 40 is seen at 6,172 points, up 12.4%, Italy's FTSE MIB at 24,000 points, up 10.6%, and Spain's IBEX at 9,000 points, up 12.8%.
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