European stocks are seen extending their new-year rally in 2012 as ultra-loose monetary policy continues to revive investors' demand for equities, although the gains could be limited by brewing worries over China's economy and Spain's debt troubles, a Reuters poll found.
The latest survey of around 50 analysts and fund managers, conducted in the past week, shows the euro zone's blue chip Euro STOXX 50 index at 2,705 by the end of December, up 8 percent from its closing level on Wednesday of 2,496.68.
The poll showed Europe's STOXX 600 ending 2012 at 285, a rise of about 8 percent from Wednesday's close of 264.1. Both indexes have surged about 15 percent since mid-December, when the European Central Bank provided banks with unlimited 3-year loans at a rock-bottom interest rate, quashing fears of a credit crunch in the debt-troubled region.
Although they are set to post their best first-quarter gains since 1998, the two benchmarks lost steam earlier this month, as a raft of grim macro data from the euro zone as well as lower-than-expected economic figures from the United States and China dented investors' renewed love for European equities, hammered in 2011 as the Greek debt crisis threatened to spread to other southern euro zone countries.
"This has been a liquidity-driven rally, but at some point in the year, we'll have a transition to a macroeconomy-driven market, and this might become a bit of a bumpy road," said Franz Wenzel, head of investment strategy at AXA Investment Managers.
"A big part of the sovereign debt crisis has been resolved, but we know that Greece is not out of trouble yet and Portugal is still facing serious issues, although the latter might not run into serious trouble this year yet," Wenzel said. The Euro STOXX 50, made of multinationals such as BMW , Inditex and Philips, was seen at 2,586 by the end of June 2012, up 3.6 percent from Wednesday's close, while the broader STOXX 600 was seen at 270 points, up 2.2 percent from Wednesday's close.
Although the region's equities still face major headwinds - such as the prospect of a new recession for a number of countries - analysts and fund managers said relatively low valuation levels should support stocks in the coming months.
The Euro STOXX 50 trades at around 10 times the 12-month forward earnings, according to Thomson Reuters Datastream, well below a 10-year average of 12.4 and also below the price-to-earnings ratio of both Wall Street's S&P 500 and the MSCI emerging equities index, 13.0 and 10.2 respectively.
Analysts and fund managers said high dividend yields will also be a major factor throughout the year, with 'yield hunters' increasingly turning to equities as interest rates remain at ultra-low levels.
The Euro STOXX 50 trades at a dividend yield of 4.03 percent, well above its 10-year dividend yield average of 3.12 percent and the 1.88 percent yield on the 10-year German Bund .
Among the main risks mentioned by market participants the prospect of a slowdown in growth in China played high. "This year seems to mark a turning point for stocks, thanks to the ECB and its liquidity injections, but we shouldn't forget one of the hot topics of the next months: China, soft or hard landing?," said Riccardo Designori, analyst at Brown Editore, in Milan.
"The impact on industrial companies, especially German firms, could be serious.