Bull market in European equities has legs, says Barclays

The bull market in European equities has legs, Barclays said in a strategy note on Tuesday, as it argued it will extend into 2021 and that investors should use potential dips as buying opportunities.

The bank noted that European equities had their best month in November in 45 years and saw one of the biggest value outperformances on record.

"Some consolidation thus seems logical, but most investors have underperformed and ‘FOMO’ (fear of missing out) might prompt them to chase the rally and look through the short-term risks," it said.

Barclays said the big picture is supportive and it expects European stock markets to reach new highs next year.

It said the unwind of the two-year long flight to safety might be just starting, as positioning looks far from stretched and that high-efficacy vaccines should bring the Covid-19 pandemic under control, allowing a gradual return to normality and a strong cyclical upswing.

Barclays said central banks and governments have ammunition left to help sustain the recovery, financial conditions are favourable, and there is pent-up demand. It also argued that earnings will rebound considerably next year, helped by easy base effects, positive delta in growth and resilient margins.

The bank said that while price-to-earnings ratios are elevated, this is not so much the case when compared to depressed bond yields.

"Post the recent rally, bullish market expectations raise the bar for positive surprises, yet we see room for continued medium-term rotation out of the still-crowded relative safe havens - bonds, cash, DM, US, growth and defensives, and into the less-owned riskier assets - equities, EM, Europe, value and cyclicals," it said.