European shares headed back towards recent multi-year highs on Tuesday as pledges of continued monetary policy support from central banks in Japan and Europe calmed jittery investors. Stocks suffered last week on concern that the US central bank could scale back its stimulus programme, but the Bank of Japan said on Tuesday its expansive monetary policy would stay in place.
That followed similar comments from the European Central Bank on Monday, when UK and US markets were closed. The FTSEurofirst 300 closed up 1.3 percent at 1,246.44, having hit a 5-1/2-year high of 1,258.09 last week. "Some investors will be nervous out there as we get towards multi-year or record highs ... but the reality is that central bankers still remain very supportive indeed," Henk Potts, market strategist at Barclays, said.
"When you look at the US (it) is a question of when rather than if (the Federal Reserve will halt its stimulus programme) but I think the markets will be able to deal with that ... It's a sign that the patient can once again stand on its own." Cyclical sectors, which usually perform better than others in a positive economic environment, were in demand, led by construction & materials and technology stocks.
Fund managers saw more gains for equities in coming months as investors continue to opt for them over bonds due to better returns - especially for cyclicals, which have lagged defensive stocks in 2013. "Equities still offer better value overall than bonds ... Looking over a longer period (beyond 3-6 months), cyclicals are better value given that defensives have done so well," said Abi Oladimeji, head of investment strategy at Thomas Miller Investment, which has 2.7 billion pounds ($4.1 billion) of assets under management.
Financials, trading on 10.8 times their 12-month forward price/earnings ratios, are the second-cheapest sector on STOXX 600 indexes, behind energy on 9.2 times, according to Thomson Reuters StarMine data. That looks cheap compared to defensive sectors such as consumer staples and healthcare, on 17.2 times and 15.1 times respectively.
"(European equities) are pretty good value; they can go higher yet," said City Financial's head of multi-asset Mark Harris, who manages 126.8 million pounds of assets. Harris, who has a large exposure to banks, and a lesser exposure to consumer staples and consumer discretionary stocks, reckoned European equities could notch up further gains of 5-10 percent this year, led by "very underowned" banks which could rally up to 20 percent from current levels by the year's end.
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