Citi sees 40% return on European equities to end-2016

European shares are set to ‘deliver’ as economic recovery in the euro area gains traction and given that valuations are not currently expensive, contrary to what some observers say, a leading broker argued on Monday.

In a research note entitled “El Toro – the European bull” analysts at Citi highlight their above-consensus growth forecasts for Eurozone gross domestic product this year and next, which they expect will drive double-digit gains in earnings per share.

Citi economist Guillaume Menuet forecasts GDP growth of 1.5% in 2015 followed by an expansion of 2.1% in 2016. In particular, Menuet highlights the positive impact which quantitative easing is having on financial conditions and what the string read-across that has to GDP growth rates.

The broker expects a 40% return on European equities up to the end of 2016.

That will come as leadership moves from companies which are ‘low risk/quality’ to a group which has more exposure to financials, cyclicals and leverage.

“Overall, investors should align with decent fundamentals, liquidity and also hedge against two-way risk in bond markets. De-equitisation and owning stocks with decent dividend yield, dividend yield-t-growth multiples and positive relative dividend momentum are two strategies which align with all three criteria.

Among the UK-listed shares which fit those three criteria are: 3iGroup, Aberdeen Asset Management, Aviva, Barclays, HSBC, Lloyds and Schroders.