By Blaise Robinson
PARIS (Reuters) - European stocks will extend their rally into the second half of the year, fuelled mostly by the European Central Bank's (ECB)recent stimulus measures, a Reuters poll showed.
Italy's benchmark index FTSE MIB <.FTMIB> is expected to be the biggest beneficiary of the ECB's latest action, set to gain 7 percent before the year-end.
Milan's index - including shares in Telecom Italia (MI:TLIT), UniCredit (MI:CRDI) and Fiat (MI:FIA) - has surged 13 percent this year, far outpacing the overall European market.
The poll of over 60 fund managers and strategists taken in the past week predicted the pan-European STOXX Europe 600 index <.STOXX> would climb 5 percent to 360 points by the end of 2014 - a seven-year high.
The euro zone's blue-chip Euro STOXX 50 <.STOXX50E> index is expected to rise 4.5 percent.
The rally was expected to extend into next year, with the STOXX 600 set to hit 373 points by the middle of 2015, and the Euro STOXX 50 reaching 3,500 points by that time.
"The main factor will be the support from the central bank," said Intesa Sanpaolo chief economist Gregorio de Felice, who puts the STOXX 600 at 367 at the end of 2014.
"In this context, ample liquidity as well as the lack of attractive alternative investments play in favour of risky assets such as stocks."
This month, the ECB cut interest rates - the deposit rate to -0.1 percent and the main refinancing rate to 0.15 percent - and launched a series of measures to pump more money into the financial system to fight off the risk of Japan-like deflation.
While 10-year German Bunds
Investment flows into the region's stocks have been brisk since this year, with significant flows into peripheral markets such as Italy. This has helped keep the euro, trading near $1.36, strong.
Ongoing reforms in a number of euro zone countries should also support stocks in the coming months, Societe Generale's head of European equity strategy, Roland Kaloyan, said.
"Within the euro area, we expect the French CAC 40 and the Italian MIB to strongly deliver over the next 12 months as structural reforms should accelerate," said Kaloyan, who sees the STOXX 600 at 340 points by end-2014.
He expects both those indexes to outperform Spain's IBEX <.IBEX>, which he says "is already pricing in a lot of good news".
The latest Reuters poll results showed the CAC <.FCHI> ending 2014 at 4,700 points, up 5 percent from Wednesday's close, with the IBEX at 11,500 points, also up 5 percent from Wednesday.
Germany's DAX <.GDAXI> - which has underperformed so far this year, hurt in part by worries over the exposure of German exporters to emerging markets - is forecast to end 2014 at 10,250 points, up 4 percent from where it is now.
A long-awaited recovery in corporate profits will also support European shares in the next six to twelve months, strategists and fund managers said.
Investors have had high hopes of a pick-up in earnings this year, but a strong euro
Most strategists and fund managers are still betting on an earnings recovery.
"An improvement in the profit outlook is precisely what the market needs most at the moment," said Mathieu L'Hoir, strategist at AXA Investment Managers, which has 562 billion euros (449.13 billion pounds) under management.
"It should mostly come from cost cutting measures, which could boost profits by 10 to 15 percent this year."
Europe bourses in 2014: http://link.reuters.com/pap87v
Dividend yields vs Bunds: http://link.reuters.com/quk32w
(Polling by Blaise Robinson and Alexandre Boksenbaum-Granier in Paris, Sudip Kar-Gupta in London and Elisa Anzolin in Milan; Editing by Louise Ireland)