By Danilo Masoni and Julien Ponthus
MILAN/LONDON (Reuters) - Easy monetary policy is expected to keep a floor under European shares in 2020, with a possible trade deal between Washington and Beijing and an orderly Brexit capable of pushing the region's main stock benchmark to a record high.
Optimism over trade and Britain's split from the European Union has already boosted European stocks to multi-year peaks this month. But any actual deal could bring extra fuel to the rally, even as the pace of gains slows as economic and earnings growth remain sluggish.
According to the Reuters poll of more than 20 fund managers, strategists and brokers surveyed over the past two weeks, the pan-European STOXX 600 (STOXX) index is expected to reach a record high of 420 points by the end of next year, up 2.9% from Monday's close, after hovering around current levels until mid 2020.
"The outlook for European equities should be benign for the next few quarters. The ECB's QE has been restarted and financial conditions are very accommodative overall," said Giuseppe Sersale, portfolio manager at Anthilia Capital Partners, referring to the European Central Bank's quantitative easing programme.
"With China and the U.S. moving towards a 'first phase deal' and the risk of a hard Brexit receding, global demand seems in the first stages of a pick up, and macro data are showing signs of improvement," added Milan-based Sersale.
Germany's trade-sensitive DAX (GDAXI) index is also expected to reach a record high by the end of 2020, up 3.6% from Monday. The euro zone's blue-chip Euro STOXX 50 (STOXX50E) index is expected to finish next year at its highest since April 2015.
The pace of growth is expected to slow after double-digit gains already recorded this year on mounting expectations of a positive outcome to trade and Brexit talks.
The STOXX 600 is expected to end the current year at 405 points, up 20% from 2018's close, in what would be its best year since 2009. The DAX and the Euro STOXX 50 are expected to end 2019 with year-on-year gains of 25% and 23% respectively.
This year's rally means European equities look more exposed to a negative outcome of the trade and Brexit negotiations, especially now that valuations are a bit stretched compared with historical averages.
"If new uncertainties do not emerge, global capital will gravitate toward high-risk asset classes in the hope of returns, even though economic growth will not yet pick up significantly," said Tomas Hildebrandt, senior portfolio manager at Evli Bank in Helsinki.
(For a graphic on STOXX 600 click, https://fingfx.thomsonreuters.com/gfx/mkt/12/9160/9072/poll%20STOXX.png)
TRADE ESCALATION RISKS
Philipp Lisibach, strategist at Credit Suisse (SIX:CSGN), International Wealth Management in Zurich, said over three to six months, he was neutral on European stocks, but for 2020 he expects them to rise slightly.
"The biggest risks are a potential escalation of the U.S. trade war with China and specifically potential U.S. tariffs on European autos. European economic growth will remain sluggish in 2020 in our eyes," he said.
Among those with bearish expectations, UniCredit strategist Christian Stocker said he expected a downside risk of up to 20% in the course of 2020, a year that would be dominated by low earnings growth in Europe and slowing earnings growth in the US.
"We consider consensus estimates to be far too high," he said.
Despite these risks and higher share price valuations, many poll respondents saw the STOXX 600 breaking above its previous record high of 415.18 points hit in April 2015.
Any major correction was also deemed unlikely. Ultra-low interest rates are set to keep bond yields at unattractively low levels, while investor positioning also remained light.
"There's a risk of correction, albeit it's not exaggerated," said Marco Vailati, head of research and investment at Cassa Lombarda.
"The active presence of the ECB and the abundance of funds parked in monetary funds limits the downside risk or could generate fuel for any further rallies," he added.
