European stocks ended higher on Friday, climbing for the fourth straight day and hitting their highest level since before the market's slump in late July, as demand for the region's equities recovered while sovereign debt fears abated. Insurers helped drive the gains, with AXA up 1.9 percent and Allianz up 1.6 percent, a day after winning concessions in European Union's tough new capital rules, potentially saving the sector billions of euros.
The FTSEurofirst 300 index of top European shares ended 0.4 percent higher at 1,106.79 points, posting a weekly gain of 2.5 percent. "The tension has dropped and risk premiums have fallen. The LTRO was a game changer, and investors see the glass half full now," said Jean-Marie Mercadal, chief investment officer of OFI Asset Management, which has 47.3 billion euros ($62.3 billion) under management. "That said, technically, the market is 'overbought' and it's dangerous to chase the rally after such a rise. I wouldn't be surprised to see 5-10 percent pullbacks in the next few weeks, which will offer entry points that investors should use to significantly increase their exposure to the asset class."
The improvement in confidence was also reflected in a sharp drop in implied volatility, with the Euro STOXX 50 volatility index, Europe's 'fear gauge' known as the VSTOXX, plunging to a low of 17.26 during the session, a level not seen since late 2007. The lower the volatility index, based on sell- and buy-options on the Euro STOXX 50 stocks, the more willing investors are to invest in higher risk assets such as stocks.
According to EPFR Global, a research firm that tracks fund flows, equity funds enjoyed a solid week, with investors showing a strong preference for exchange traded funds (ETFs), as the Dow Jones industrial average moved above the key 13,000 point mark and Tokyo's Nikkei average broke the 10,000 point level. "ETFs certainly provide investors with the quickest way to tap into the latest bounce in global equity markets," EPFR Global Research Director Cameron Brandt said.
The euro zone's blue chip Euro STOXX 50 index gained 0.6 percent on Friday, ending at 2,608.30 points. Even after the sharp rally since mid-December, stock valuation levels remain relatively low, with the Euro STOXX 50 trading at 9.2 times 12-month forward earning, well below its 10-year average of 11.6, according to Thomson Reuters Datastream.
This compares with a price-to-earnings ratio of 12.6 for Wall Street's S&P 500 and 10.2 for the MSCI emerging equities index. "Compared with 10-year averages, valuation ratios are far from being excessive, especially as they're calculated with earnings forecasts that have been slashed by 15 percent over the past nine months," said Eric Galiegue, head of Valquant, a Paris-based financial research firm. Around Europe, UK's FTSE 100 index gained 0.4 percent, Germany's DAX index added 0.2 percent, and France's CAC 40 climbed 0.4 percent.