European shares climbed to end near six-month highs on Thursday after losses in the previous three sessions, with encouraging U.S. economic figures and an austerity package agreed by Greek policymakers prompting investors to buy cyclical stocks.
Analysts said the European equity market, which has surged more than 20 percent since November, had the potential to scale new highs in coming months because the global economic picture was improving, company earnings remained resilient and liquidity in the euro zone financial system had increased.
They advised investors to use price dips as buying windows and gradually increase their exposure to cyclicals such as autos, banks and constructors, which could gain strongly in the event of an increase in the pace of global economic recovery.
The STOXX Europe 600 automobile index <.SXAP> rose 2.9 percent, led by a 4.6 percent gain in German luxury carmaker Daimler
It said profits were boosted in 2011 by a record performance from Mercedes-Benz and that it expected record sales in 2012.
The FTSEurofirst 300 index <.FTEU3> of top European shares finished 0.3 percent higher at 1,073.53 points. It had touched 1,079.97 on Wednesday, the highest since early August.
The market has the potential to go up further. Economic support is there and earnings are continuing to do well, said Anko Beldsnijder, managing director of MainFirst Asset Management, which manages 1 billion euros (840 million pounds).
I would buy a combination of cheap cyclicals such as cars and mining. I would also stick to a bunch of defensives having strong business models, such as Imperial Tobacco Group
The market got some support from figures showing the number of Americans filing new claims for unemployment benefits unexpectedly fell last week, underscoring a firming of the jobs market.
That followed a series of recent economic releases pointing to improvement in the U.S. economy.
Beldsnijder said he would avoid sectors such as telecoms and
utilities that were exposed to austerity measures, and would prefer to invest in companies that confirm their outlooks. Hugo Boss and Daimler were examples of such companies, he added.
German fashion house Hugo Boss
News that Greek leaders had finally agreed a deal on reforms and austerity measures needed to secure a bailout and avoid a messy default also supported the market.
After the European Central Bank (ECB) left its key interest rate at a record-low 1 percent, its president, Mario Draghi, opened the door to indirectly help Athens after the agreement on the austerity package.
Greece has urged the ECB to hand back profits on Greek bonds it holds, a move that could raise 12 billion euros (10 billion pounds)or more to help fill a gap in its financing needs. Draghi hinted the bank could do this for all euro zone countries.
Some analysts said the party leaders' agreeing on structural reforms was not the final word on Greece, and that the issue of private-sector involvement had to be agreed on.
However, the market is sanguine about Greece and I would not expect a default by Greece, said an economist at a European fund company that manages several hundred billion dollars.
The European Central Bank's action has reduced the threat of an outright credit crunch in the euro area, the economist said.
He added it would further boost liquidity in the financial system through its longer-term refinancing operations -- a mechanism under which banks can borrow money.
That's definitely a plus for the market. The resilience of the global economy is also a positive factor, he said.
Investors should use market pullbacks to build more trading positions and increase exposure to sectors that have high beta -- those related to growth -- he said, adding they should think of cautiously moving back into cyclicals.
Belgian financial group KBC
(Editing by David Hulmes)