By Samuel Indyk and Danilo Masoni
LONDON European equity markets are forecast to eke out a modest rise in 2024, a Reuters poll found, as optimism that global interest rates have peaked is offset by worries the economy could fall into a recession.
Fund managers and equity strategists surveyed Nov. 10-20 expect the pan-European benchmark STOXX 600 index to rise to 475 points by the end of next year, implying a 4.1% increase from Monday's close at 456.26.
The Euro STOXX 50 index of the 50 largest and most liquid stocks in Europe is seen rising by an even smaller 2.5%, to end next year at 4,450 points, the survey median found.
In 2023, Europe's main indexes have had a broadly positive year, with the STOXX 600 gaining over 7% and the Euro STOXX 50 over 14%, much of the rally arriving at the beginning of the year when Europe's economy was seen benefitting from China's reopening.
But the euro zone's economic headwinds gathered momentum through 2023, and Germany - the bloc's industrial heartland - appears to be the biggest drag given its energy-intensive heavy industry, which relies on cheap gas and external demand for growth.
"A slowdown in growth is still the base case for 2024," said Chris Beauchamp, chief market strategist at IG, "though a recession might yet be avoided if energy prices ease and the European Central Bank employs some judiciously cautious rate cuts."
The ECB likely ended its tightening cycle in October, keeping the deposit rate at a record high 4.00% after an unprecedented tightening cycle that began when the deposit rate was negative in July last year.
Money market traders are betting September's hike was the last, with almost 90 basis points of rate cuts priced by the end of 2024.
If the ECB meets those expectations, strategists see outperformance in riskier areas of the market.
"Risk appetite will drive investors towards growth over the next six months, especially as central banks adopt a more dovish stance," said Thomas Monteiro, senior analyst at Investing.com.
Germany's DAX was seen rising 5% by the end of next year, the survey found, having risen 14% so far in 2023.
The survey found a similar scenario for Britain's FTSE 100, which is expected to rise 6.7% by the end of 2024, after a broadly unchanged year to date.
"While inflation has cooled to a two-year low and the Bank of England appears to be at the end of its rate hiking cycle, concerns over a recession will likely act as a headwind over the coming months," said Fiona Cincotta, senior market analyst at City Index.
"With the prospect of a recession in the coming quarters, sentiment towards UK equities could be weak, particularly if the U.S. economy continues to fare comparatively better," Cincotta added.
European shares underperforming their U.S. counterparts was a common expectation amongst the survey's European respondents as the robust American economy looks more likely to achieve a 'soft landing' than Europe.
European shares are much cheaper than those in the U.S., possibly reflecting the worse economic outlook.
The STOXX Europe 600 trades at over 12 times 12-month forward earnings, a 35.6% discount to the S&P 500. The current discount is just above a record gap of around 37% reached in July and more than twice the 20-year average discount of 16.3%.
Investing.com's Monteiro said Europe's industrial and consumer slowdown looks more "broad-based" than the U.S. but still sees room for upside in European stocks in the near term.
"It's likely that a year-end rally in the U.S. would also push European equities higher due to the sheer risk appetite in the world it would prompt," Monteiro said.
"Still, as the broader economic slowdown takes hold of the continent's markets, we expect to see a rather challenging second half of 2024."
(Reporting by Samuel Indyk and Danilo Masoni; additional polling by Pranoy Krishna, Rahul Trivedi and Sarupya Ganguly in Bengaluru; editing by Jason Neely)