LONDON, Nov 11: Investors pondering the outlook for European shares in 2006 might do better to stick with the tried and tested rather than give in to their sense of vertigo, analysts say.

Instead of worrying about how far share prices have already risen investors should stay focused on company fundamentals and on equity valuations, which are supportive — just as they were this time last year, and the year before that.

I wouldn’t be surprised if we saw another 10-15 per cent of gains next year, Patrik Schowitz, European equity strategist at HSBC said. And that’s being conservative.

But the impressive cumulative gain — almost 19 per cent this year alone — shows how far share valuations fell in the first place and is more that matched by the pace at which companies have boosted their profits.

The FTSEurofirst300 still has almost 500 points — or more than 40 per cent to go — before it reaches the bubble highs of 2000.

In short, analysts say there is still good reason to be cautiously optimistic.

European shares are priced at around 13-14 times 12-month forward earnings, which is the cheapest they have been since 1995, and 10-15 per cent gains will barely change that if next year’s consensus earnings forecasts prove correct, according to HSBC.

It might not mean the sky’s the limit on the upside but it does mean that the downside is limited, Schowitz said.

Gareth Evans, a European equities strategist at ING, has a similar view but warned that the market’s gains could come mainly in the short-term.

There is a limit to the downside simply because valuations are so attractive but the picture could look different in a few months time, Evans said.

He said European shares had built up momentum and were poised to extend the 3-1/2 year highs struck last month, helped by a drop off in inflation fears because of a pullback in oil prices.

Looking ahead to the next few months, the risk is to the upside, which of course sets us up for some possible disappointment around the middle of next year, he said.

Among the key risks Evans and others cite is that of slower US growth as the boost from post-hurricane reconstruction starts to fade and as a weaker housing market dents consumer morale in the world’s biggest economy.

Anais Faraj, global strategist at Nomura, said he saw European shares underperforming other regions next year but said he still expected broad regional gains of 7-8 per cent.

Any pullback set off by Wall Street was more likely to be a buying opportunity than the start of a new bear market, Faraj said.

—Reuters