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OPINION

European equities back in fashion

European equities back in fashion
July 30, 2014
European equities back in fashion

 A Bank of America Merrill Lynch survey showed that a record 51 per cent of those polled, with $600bn assets under management between them, saw European equities as a good investment over the next 12 months, the profit outlook the strongest since 2009. Many are already overweight stocks, a net 58 per cent globally, while 79 per cent see bonds as overvalued. All these metrics lie towards the extremes of the last decade.

With this in mind we shall look at the charts of their favoured nations' indices, noting that the consumer discretionary sector is very much in vogue, while commodities and banks are so last season. Let's see if they're likely to be on trend.

 

Dax has lift-off

 

Germany, unsurprisingly the stylists' top pick, where the Dax chart certainly shows a phenomenal rally since October. In a way, the contrast with the previous 15 years, capped at the 8200 area, is the type of secular move sometimes seen in emerging market indices. There is certainly an element of 'catch-up' here, with the first measured target (based on the height of the massive right-angled triangle) at 11800 met already while the next one lies at 14100. Worth remembering that only 13 per cent of Germans own shares, directly or via funds, and maybe they are ready to embrace this type of investment.

  

Ibex has a hurdle

 

Spain surprises as second choice, the Ibex index still not quite recovered to January's 2010 post-crisis high - after dipping in 2012 below 2009's nadir (until 'whatever it takes' kicked in). We are still well below 2007's record at 16040 and at levels not far off the peak at the millennium (12968). If the index can hold above Fibonacci resistance at 12170, then a rally towards 15000 might be do-able over the next 12 months (possibly longer).

  

Poor show in Milan

 

Third slot Italy's MIB index is a lot less attractive, trading at a fraction of 2000's record high (50108). Best foot forward and all that, but it has been stuck between 12300 and 24558 for six years and strong resistance at the psychological 25000 might prove impenetrable. Milan fashion is not for The Trader. Cheap, but might yet be relegated to the bargain basement.

  

Amsterdam features

 

 

Finally the Netherlands' AEX index, perhaps not as well-known to our readers, but containing world-class names such as Heineken and Unilever. Rather like the FTSE 100, this one had a roaring ride from 1982 and then stopped, violently, at the end of the millennium. An appalling hangover followed and, since then, it has not managed to regain the record high at 700. However, like Germany, it has certainly tried hard since October, with three consecutive annual rallies under its belt. If we can start holding above 550, then maybe it will dazzle in the autumn/winter collection.

Therefore there is a chance the fund manager survey results will come true in three out of the four countries picked. What might be the more interesting question is how modish US and UK investors will react when suddenly their shares are unfashionable. We will investigate these next week.

 

MORE FROM NICOLE ELLIOTT...

Nicole Elliott is a long standing Member of the Society of Technical Analysts and has just taken over the IC's trading coverage. She is regularly interviewed and quoted by the financial media, is a conference speaker, and author of several books on charting.

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