European stocks to face central bank test after strong 2017

MILAN/LONDON, 5 October 2017 - European shares are set to end 2017 with close to double-digit gains, supported by a recovery in economic growth and corporate earnings, but the pace is likely to slow as the European Central Bank moves to cut its massive stimulus.

A Reuters poll of brokers, fund managers and analysts taken over the past week forecasts top euro zone blue chips .STOXX50E rising nearly 11 percent this year with gains halving to around 5.5 percent in 2018.

It is predicted to close this year at 3,649 and 2018 at 3,850.

Spanish stocks .IBEX, hit over the last few weeks by worries over a severe constitutional crisis, are expected to end this year up nearly 14 percent, a sharp cut compared with the 20 percent rise expected in the previous Reuters poll.

The broader pan-European STOXX 600 index is seen rising 9.3 percent in 2017 and around 7 percent in 2018, leaving behind UK equities which instead are expected to suffer from worries related to the country’s exit from the European Union.

End-2017 forecast was 395 and end-2018 was 420.

“The synchronized upswing in the euro zone will sustain the current bull market until the end of the first quarter of 2018,” said Warin Buntrock, deputy chief investment officer at BFT IM, which is overweight euro zone equities.

“Starting from the second quarter of 2018, investors will gradually shift their focus on the coming inflexion of central bank policies. Equities will become more volatile and stagnate until the end of 2018 as valuations are rich,” he added.

The ECB is expected to start winding down its massive stimulus early next year in a move likely to be announced at central bank’s next meeting on October 26.

While monetary tightening is likely to support the banking sector through higher interest rates, it could also hurt dividend paying and heavily-indebted sectors such as utilities and telecoms.

After peaking at two-year highs in May as political worries evaporated after Emmanuel Macron’s decisive victory in the French presidential election, European shares suffered from an unexpected rise of the euro this summer.

Even though the Euro STOXX 50 has recovered from the summer sell-off, the Reuters poll suggests it would remain below the May peak throughout the rest of this year.

The index would only exceed that level and possibly climb back to pre-crisis levels during the course of 2018.

“I‘m constructive, but expect more sector rotation than strong upside,” said Angelo Meda, head of equities at BANOR SIM.

Besides the focus on the ECB, investors will also have to deal with a resurgence of political worries with Spain facing its deepest constitutional crisis in decades and Italy holding a general election in 2018, while the German vote last month delivered a fourth but possibly weakened term for Chancellor Angela Merkel.

Poll medians predict Germany's DAX .GDAXI rising 13 percent this year to a fresh record high of 13,000 and surge another 5 percent in 2018, while France's CAC 40 .FCHI is seen up 11 percent and 7 percent in 2017 and 2018 respectively.

Italy's FTSE MIB .FTMIB is the front-runner to end 2017 as the best performing country index with an expected surge of almost 20 percent. Its gains in 2018 however are seen slowing to 4 percent.