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European stocks’ rebound gathers steam

German and French stocks are closing in on a 20 per cent gain from their post-Brexit low, as a weaker euro and a thawing in sentiment towards banks raise the prospect that markets which disappointed investors for much of 2016 end it in positive territory.

While the rebounds of the the two largest equity markets on the continent have been overshadowed by the run of new record highs in US equities, there are hopes that an improvement in the eurozone economy in 2017 will extend the rally.

Germany’s Dax 30, home to companies including Allianz and Adidas, closed up 2 per cent at 10,986.69, taking its gain since the immediate aftermath of the Brexit vote in late June to 18.5 per cent. The CAC 40, France’s benchmark equity index, finished up 1.4 per cent at 4, 694.72, leaving its advance since over the same period at 18 per cent.

“Waiting for outperformance in eurozone financial markets has felt like waiting for Godot,” said Wouter Sturkenboom, senior strategist at Russell Investments. “Every time it looked like an upward trend had been established, something caused it to falter. However, fundamentals have remained favourable in 2016 and this combined with attractive valuations continue to point to an overweight position in eurozone equities.”

A strong showing from European equities comes ahead of Thursday’s meeting of policymakers at the European Central Bank who are expected to extend the €80bn a month bond-buying programme. The QE programme has helped buoy corporate bond prices in the eurozone and, according to Citigroup, leaves equities looking cheap.

“Equities look extremely cheap relative to government and corporate bonds, especially if growth is delivered as we expect,” strategists at the bank said in a report published on Wednesday.

As on Wall Street, banks have been among the best performing shares since Donald Trump’s victory in the US election – an event that injected more momentum into the rebound in European equities. Deutsche Bank is among the best performing stocks on the FTSE Eurofirst 600 since the start of November, up by around 30 per cent. French bank Société Générale is over 20 per cent higher.

At the start of the year, the continent’s stocks were heavily tipped to outperform but for much of the year failed to live up to their star billing that was based on the hopes that a weaker euro and continued stimulus from the ECB would send investors into Europe after a run of outperformance from the US.

While the euro spent much of the year defying forecasts it would weaken substantially, it has dropped 2.5 per cent against the dollar since the election of Mr Trump.

As 2016 draws to a close, there are signs within exchange traded funds that sentiment towards European equities is improving. According to BlackRock, the asset manager that is a major ETF provider, there were inflows of $1.2bn into European equities in November. By comparison, in the first ten months of the year there were withdrawals of almost $42bn from ETFs tracking European equities, according to ETFGI.

After this week’s referendum in Italy on constitutional reform, some investors are wary of the threat to European equities from upsets in elections next year. However, Rory Bateman, head of European and UK equities at Schorders, says “we take the view that market uncertainty and volatility frequently present opportunities to buy good companies at attractive valuations.”

The shift in sentiment towards European stocks has been enough to send German and French bourses into positive territory for the year. The former is up 2.3 per cent, while the latter is 1.2 per cent.

However, the Euro Stoxx 600, the broad European benchmark index, remains down about 5 per cent for the year.

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