China data pushes European shares to 2-week highs

European shares hit a two-week high on Thursday as Chinese economic data gave a further sign of recovery in the world’s second-biggest economy, encouraging investors to put more money into stocks.

The China HSBC Flash Manufacturing Purchasing Managers Index, which largely reflects the private manufacturing sector, hit a 13-month high of 50.4 in November. It followed figures on Wednesday showing US manufacturing picked up at its quickest pace in five months in November.

“There are questions over whether the Chinese economy is really that bad or if the US will take a long time to recover, but we are getting signs that the situation is not as bad as assumed,” Peter Braendle, head of European equities at Zurich-based Swisscanto Asset Management, said.

“I am betting on a positive economic environment. I suspect that many investors are still ‘underweight’ European equities and they have to catch up a little bit,” said Braendle, whose fund company manages nearly US$60 billion.

Braendle said he raised his exposure to KBC last week and was keeping an eye on financials like Barclays and BNP Paribas, adding: “For me, it’s a question of valuation, which is far too low and has potential to catch up.”

Barclays was on a price-to-book ratio of 0.5, while BNP traded at 0.7, against 1.5 for the broader STOXX 600 index, according to Thomson Reuters data. Braendle said Barclays and BNP traded on a ratio of about 1.0 some years ago.

Sectors more sensitive to economic growth were among the top gainers, with miners rising 1.1 per cent, technology gaining 0.8 per cent and the travel and leisure sector climbing 0.7 per cent.

At 8.48pm, the FTSEurofirst 300 index was up 0.4 per cent at 1,101.68 points after rising to 1,103.20, the highest since November 8. It has so far gained more than 3 per cent this week, the best weekly performance since early February.

A positive outlook was also reflected in a note from Bank of America-Merrill Lynch, which said investors should position for a ‘great rotation’ out of bonds and into equities next year, fuelled by high liquidity and hopes for future global growth.

They recommended to buy US, UK and continental European equities this year, although warned a rally into the end of the year would depend on good purchasing manager indexes (PMI) data and a positive outcome to budget talks in the United States.

The bank recommends hedging long positions with shorts on the European insurance sector, which has rallied 35 per cent since June, and options to sell the S&P 500.

The euro zone’s blue chip Euro STOXX 50 index rose 0.5 per cent to 2,531.24 points, with charts showing that the index had potential to advance further in the coming days.

Roelof-Jan van den Akker, senior technical analyst at ING Commercial Banking, said the index was still in a sideways environment and was likely to face resistance at around 2,555 – a falling trendline that started from its September highs.

“We could see somewhat higher prices in the next few days, but looking at a longer-term weekly chart, it faces horizontal resistance at 2,610. As long as this level is not broken, we should expect a continuation of the sideways price action between 2,400 and 2,600.”

Analysts said investors were likely to stay cautious in the coming weeks following worries related to the US fiscal negotiations, but they should look for a balanced approach by buying some cyclicals.

Robert Parkes, equity strategist at HSBC Securities, said there were risks in having a purely defensive portfolio at this point in time, but noted that some investors were still trying to avoid risk, which was reflected in equity valuations.

According to Thomson Reuters Datastream, the broad STOXX 600 trades at 11 times its 12-month forward earnings, still well below a 10-year average of 12.3, against a price-to-earnings ratio of 12.1 for Wall Street’s S&P 500 .

Some positive corporate news also helped in improving sentiment. SABMiller, the world’s second-biggest brewer, rose 6.7 per cent after posting a 12 per cent rise in first-half profit.

Turnover was thin as US markets were shut for Thanksgiving. Trading volume on the FTSEurofirst 300 was just 25 per cent of its 90-day daily average by midday.