European Stocks Will Gain 11% in Second Half, Strategists Say

By Alexis Xydias and Adria Cimino

July 23 (Bloomberg) -- Improving company profits will spur the biggest year-end rally for European stocks since 2006, according to a survey of strategists.

Benchmark indexes in the region may climb 11 percent between June 30 and the end of 2009, according to the average prediction of 11 European market analysts surveyed this week by Bloomberg. That compares with an 8.4 percent advance for the Standard & Poor’s 500 Index estimated by 10 U.S. strategists.

Rising earnings will justify the highest valuations since December 2003 and lure investors after the Dow Jones Stoxx 600 Index dropped 46 percent last year, the most on record, according to the strategists. The predicted increase would be the biggest for the final six months of a year since the gauge rose 14 percent in 2006, data compiled by Bloomberg show.

Gains “will be linked to the earnings reports, and so far they’ve been reassuring,” said Kilian de Kertanguy, a fund manager at Cholet-Dupont Gestion SA in Paris, which oversees about $2.3 billion. “There is a lot of capital waiting to be re-injected into the market. If there is a real sign of improvement from companies, the capital will go to stocks.”

The Stoxx 600 index added 6.8 percent last week, the most since November, reviving a rally that’s driven the gauge up 37 percent in four months. Speculation the first global recession since World War II is ending has pushed the measure up 8.7 percent this year, erasing a loss that reached 20 percent on March 9. It added 0.3 percent yesterday to 215.65.

Positive Surprises

Of the 43 Stoxx 600 companies that reported second-quarter results since July 8, 26 beat estimates while 15 trailed them. Two reported results that matched projections, the data show.

Nokia Oyj, the world’s biggest maker of mobile phones, reported net income last week of 380 million euros ($540 million), surpassing analysts’ predictions. Competition from Cupertino, California-based Apple Inc.’s iPhone and the BlackBerry, made by Research In Motion Ltd. of Waterloo, Ontario, forced the Espoo, Finland-based company to reduce forecasts for market share and profitability.

Royal Philips Electronics NV, Europe’s biggest consumer- electronics maker, reported a quarterly profit on July 13, defying analysts’ expectations of a loss, and said second-half sales may increase from the first six months of 2009.

Results such as those may help halt a year-long decline in analysts’ profit forecasts for next year. Since Jan. 4, 2008, the current-year consensus estimate of Stoxx 600 earnings has slipped every week except for the one ended June 12.

‘Squeezed Higher’

“Any surprise in second-quarter earnings could see stocks squeezed higher,” said Gary Baker, co-head of international investment strategy at Bank of America Corp.’s Merrill Lynch & Co. unit in London. He didn’t participate in the survey.

Guillaume Chaloin, a fund manager at Meeschaert Asset Management in Paris, said the economy may limit equities. German investor confidence unexpectedly fell in July, according to the ZEW Center for European Economic Research in Mannheim. European unemployment rose to the highest in a decade in May.

“I’m not convinced that the market will take off,” said Chaloin, whose company oversees $3.5 billion. “I’m not optimistic.”

Morgan Stanley’s Teun Draaisma, who forecast losses for European stocks in 2008, and Matthias Joerss of Sal. Oppenheim Jr. & Cie. were the only two surveyed to predict declines. Nomura Holdings Inc.’s Ian Scott forecasts a 6.2 percent advance this year in a FTSE European index that excludes the U.K.

Jean-Francois Robin, a strategist at Natixis in Paris, says the worst of the economic slump is over and investors will return to markets because they hold “a lot of cash.” He predicted the biggest increases among the strategists polled.

“The Armageddon scenario is out of the picture,” said Robin, whose forecast implies 20 percent gains. “The worst seems to have passed. The economy isn’t as dark, and growth and company outlooks are improving.”

     The following table lists forecasts for European benchmark
indexes at the end of 2009 from 11 strategists surveyed by
Bloomberg News. Percentage changes are based on the June 30
market close.

Brokerage            Benchmark              Target   Gain/Loss
===============================================================
Morgan Stanley       MSCI Europe Local       850       -6.4%
SocGen Cross Asset   DJ Stoxx 600            230       12.0%
Goldman Sachs        DJ Stoxx 600            235       14.0%
JPMorgan Chase       MSCI Europe Local     1,080       19.0%
Nomura               FTSE Europe (ex-UK)     280        6.2%
UBS                  FTSEurofirst 300      1,000       18.0%
ING Groep            DJ Stoxx 600            210        2.0%
ABN Amro             DJ Stoxx 600            230       12.0%
Exane                DJ Stoxx 600            220        6.9%
Natixis              DJ Euro Stoxx 50      2,877       20.0%
Sal. Oppenheim Jr.   DJ Euro Stoxx 50      2,250 to    -6.3% to
                                          2,400       -0.1%
Credit Suisse        DJ Euro Stoxx           250       12.0%

To contact the reporters on this story: Alexis Xydias in London at axydias@bloomberg.net; Adria Cimino in Paris at acimino1@bloomberg.net.