US fiscal hopes keep European equity rally alive

Wed Dec 19, 2012 12:39pm EST

* FTSEurofirst 300 up 0.4 percent

* Banks, insurers lead as CS upgrades financials

* UBS shrugs off $1.5 billion LIBOR rigging fine

By David Brett

LONDON, Dec 19 (Reuters) - Banks led European shares higher on Wednesday as optimism on a deal to avoid tax hikes and spending cuts in the United States kept alive the end-of-year rally in equities.

The FTSEurofirst 300 - which has risen in December in 12 of the last 15 years - climbed 0.4 percent to end at 1,142.13 points, just off a fresh 19-month closing high.

"Given the recent rally in the market over the last few weeks we have seen an aggressive return to risk. The negative macro headlines seem to be secondary to the move out of safe havens and defensives on the expectations that a 'fiscal cliff' resolution will be achieved," Atif Latif, director at Guardian Stockbrokers, said.

Banks, which rose 1.5 percent, were top performers, while insurers added 1.1 percent, with bullish notes form big investment banks helping heavyweight sectors higher.

Credit Suisse raised its recommendation on financials to "overweight" from "benchmark" in a 2013 equity strategy note and highlighted Britain's Lloyds Banking Group as looking abnormally cheap compared with its peers. Lloyds shares jumped 4.4 percent.

Swiss bank UBS showed little reaction to a $1.5 billion fine for its role in manipulating global benchmark interest rates, with analysts saying the fine would have little impact on investors' views on the company.

"The $1.5 billion was in line with previous press reports, so in that sense it wasn't a surprise. The amounts are affordable for UBS ... They won't change people's investment thesis," said Jon Peace, banks analyst at Nomura in London.

The strength in financials kept European equities on course for another strong December and Credit Suisse recommended buying cheap "real" assets, such as shares, in 2013 as it expects financial repression to continue and bond yields in the developed world to fall to between minus 1.5 percent and minus 2 percent.

Fund managers looking for better yield on their investments could do worse than investing in German, UK and other European equities, which offer dividends yields of between 3.5 percent and 4 percent, according to Thomson Reuters data.

CEMENTING GAINS

An improvement in the global economy in the coming year would add to the attraction of equities, which have seen their price-to-earnings multiples re-rate during the recent rally and now need earnings to catch up.

Deutsche Bank expects cement stocks to be among the frontrunners in any cyclical recovery in 2013 and recommended "buying" Heidelberg Cement, up 4.9 percent, Buzzi Unicem, up 6.6 percent, and Lafarge, which rose 3 percent on Wednesday.

For a cyclical recovery to take place businesses and consumers need to gain confidence that the ultra accommodating policies being adopted globally by central banks will eventually lead to stronger growth.

A U.S. budget deal though could give further impetus to a Christmas rally in equity markets that has become something of a tradition.

"Generally the biggest impact at this time is seasonal so excess cash tends to be put into the market for the year end," said Lucy MacDonald, CIO Global Equities at Allianz Global Investors, which manages around 300 billion euros ($400 billion).

"On balance ... you would expect the market to carry on going up towards the end of the year."

The euro zone's blue-chip Euro STOXX 50 was up 0.4 percent at 2,654.69, its highest level since August 2011.

Barclays Capital technical analyst Lynnden Branigan, encouraged by the Euro STOXX 50's close on Tuesday above the top of a range seen over the past week, targets 2,709 - the intra-day peak hit on Aug. 1 2011 just prior to a market downturn - in the run-up to year-end.

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