European equities will beat 2010 gains by the end of next year, as companies get some help from better earnings and record-low interest rates that will overcome the sovereign debt crisis, Bloomberg said, citing a survey of 13 strategists.
The survey expects the equities to climb 12 percent in 2011.
Goldman Sachs Group Inc, the most bullish forecaster, says the Stoxx Europe 600 Index will rally 20 percent because the profits may expand twice as fast as the 14 percent average rate in more than 26,000 analyst estimates compiled by Bloomberg, the report said.
The report quoted an analyst with JPMorgan Chase & Co stating that it expects profit margins to continue to expand, and the general consensus for earnings growth could actually prove to be too low.
Despite concerns regarding some countries' ability to fund deficits, European companies are expanding and reporting profits, Bloomberg reported.
Germany, in particular, has one of the strongest economies in the region. The country increased its growth forecast last week and also reported industrial production above economists' expectation for October.
The benchmark Stoxx 600 has advanced 8.7 percent this year as the U.S. Federal Reserve pledged up to $600 billion of bond purchases to support the world's largest economy. The gain trails the 10 percent advance in the Standard & Poor's 500 Index. Europe is forecast to expand by 1.7 percent next year, according to the International Monetary Fund, Bloomberg said.
The earnings yield for Stoxx 600 companies, or profit as a proportion of the share price, is 6.53 percent, which is 3.6 percentage points more than the yield of 10-year German government bonds, Bloomberg said.
Goldman Sachs believes this valuation favors equities, and recommended that investors buy companies who have sales operations in the largest emerging markets and those in core European economies as Germany.
U.K. and Germany are among the best investment opportunities, according to Morgan Stanley, which expects economic growth to exceed bond yields in both countries, a bullish signal for shares, the report said.
France and Italy are two other regions recommended by UBS, according to the report.
The two regions have been pushed around by sovereign fear while having improving earnings momentum, the report said.
Bloomberg's data indicates that France's CAC 40 Index and Italy's FTSE MIB are trading at or less than 10 times 2011's estimated earnings, compared with a valuation of 11 for Germany's DAX.
However, 2010 forecasts by strategists seemed a little ambitious as the region's government-debt crisis eroded confidence, Bloomberg said.
Stocks in Europe's most-indebted countries and increased price swings pushed Europe's benchmark gauge of stock-market volatility to a five-month high last week. Those trends are likely to continue next year, Bloomberg added, citing Goldman Sachs.
Ireland's EU/IMF-sponsored bailout could continue to hurt sentiments.
The Euro Stoxx 50 Index may fall to 2,400 by mid-2011, hurt by the sovereign-debt crisis and cost-cutting measures within euro-region economies, according to Tammo Greetfeld, a Frankfurt-based strategist at UniCredit SpA, the Bloomberg report said.
Even so, short-term growth concerns still linger in the euro-zone.
Growth in the eurozone could be strained in the short-term as several countries adopt various measures to stabilize the region, which could weigh on the overall equity market, according to Greetfeld.
Short-term concerns aside, the overall outlook for the equity markets remain robust, the report said.