European Stock Slump to Extend Into 2009, Exane Strategists Say

By Alexis Xydias

Nov. 21 (Bloomberg) -- European stocks may fall further and only rebound in the second half of next year as investors favor high-yielding bonds in the face of a prolonged contraction in corporate earnings, Exane BNP Paribas said.

Equity prices may not yet fully reflect the economic slowdown and a cycle of earnings deterioration that may only improve in 2010, strategists at the brokerage unit of BNP Paribas SA wrote in a report today.

``It is too early to call an end to the bear market,'' Bert Jansen, Lars Kreckel and Helene Jousse wrote in the note. ``Credit conditions will be slow to improve, while the earnings cycle is unlikely to trough before 2010.'' Stocks may gain in the second half of 2009 ``in anticipation of, rightly or wrongly, better economic times ahead,'' they wrote.

Europe's Dow Jones Stoxx 600 Index has plummeted 48 percent this year, as the financial turmoil worsened the region's economic slump and forced governments to bail out banks. The benchmark now trades at 8.4 times reported earnings of the companies in the index, near the cheapest since at least 2002.

``Valuations look increasingly attractive,'' the strategists said. Still, they ``are not yet at levels associated with bear-market lows,'' they said.

Analysts have reduced their estimates for profits this year at Stoxx 600 companies. They now expect a 10 percent drop, compared with 11 percent growth forecast at the start of the year, according to data compiled by Bloomberg. They estimate earnings will rebound 5.6 percent in 2009, the data show.

Exane's strategists expect shares in the region to return 8 percent next year, of which 3 percentage points will be made up of dividends.

Jansen and Jousse are based in Paris, and Kreckel is based in London.

To contact the reporter on this story: Alexis Xydias in London at axydias@bloomberg.net.