The stock exchange in Frankfurt. Earnings growth for firms in the Stoxx Europe 600 is projected at 5.8 per cent this year. Image Credit: Reuters

London: Strategists are starting to cast doubt on the powerful new-year rally in European equities.

The Stoxx Europe 600 Index is expected to lose 6 per cent from Wednesday’s closing levels to 358 points by the end of 2019, according to the average projection in the latest Bloomberg poll. The Euro Stoxx 50 Index, home of the Euro-area’s biggest companies, is seen declining 4 per cent from current levels to 3,238, according to the average survey estimate.

The region’s equities this week almost erased the impact from the end of 2018’s sell-off as the dovish stance of global central banks and optimism that the US and China will reach an amicable trade deal fuelled a rebound of 13 per cent. However, this year’s bounce displays signs of low conviction as outflows from European equity funds continue almost unabated and the monthly Bank of America Merrill Lynch fund manager survey showed that being short European stocks is the most popular trade globally.

The European equity market remains a victim of messy politics, deterring many foreign investors, with all eyes focused on the UK’s Brexit deliberations, which show few signs of progress. UK and European equities are the most disliked regions globally, according to the BofA survey.

Despite that, some investors such as Evermore Global Advisors are buying in and the likes of Morgan Stanley and BofA say European equities can outperform in the coming months. Those who believe European stocks can rise further emphasise their cheap valuations and say the potential bottoming in sentiment and economic data could spur foreign money manager interest.

Another factor that could propel European stocks this year is profit growth outpacing that of US companies, whose earnings boom is forecast to slow in 2019. Right now, earnings growth for companies in the Stoxx Europe 600 Index is projected at 5.8 per cent this year, up from 4.7 per cent in 2018 and compared with 5.1 per cent for the S&P 500 Index.

However, analyst downgrades of European profits have been outnumbering upgrades since August, according to Citigroup Inc.’s index.

— Bloomberg