The euro zone blue chip Euro STOXX 50 index is set to gain in excess of 10 percent in 2014 as stimulus from the European Central Bank helps reflate the euro zone economy, strategists at Bank of America Merrill Lynch (BoAML) write.
BoAML's strategists expect the ECB to act decisively to help avoid deflation and they anticipate liquidity measures, such as a programme of cheap loans to banks known as a long-term refinancing operation (LTRO), to help markets consolidate.
This should fuel economic growth of 0.8 percent in the European Union, which should see earnings-per-share (EPS) growth materialise by mid-2014 to hit 12 percent for the whole year. The bank has a target on the Euro STOXX 50 of 3,400 by the end of 2014.
"If accommodative policy and avoidance of the deflation trap do indeed allow the nascent euro zone recovery to blossom, we anticipate 9 percent to 12 percent upside to key EU indices," strategists at BAML write in a note.
"In our view, reflation means scope for EPS growth and rising stocks in 2014."
On a sectoral basis, the U.S. bank identifies three themes.
Telecoms, energy, aerospace and pharmaceuticals are favoured for their dividend growth and potential to return cash to shareholders. The stabilisation of the macro environment should help banks, while food retail has good operating leverage and should outperform as growth returns.
The bank rates all these sectors as "overweight".
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