Bloomberg

(Bloomberg) -- A year ago today, European equities hit their highest levels ever. But the euphoria about Mario Draghi’s stimulus program didn’t last, and trader skepticism is now rampant.

The Stoxx Europe 600 Index has lost 17 percent since its record, and investors who piled in last year are now unwinding bets at the fastest rate since 2013 as analysts predict an earnings contraction. The trading pattern looks familiar: a fast run to just over 400 on the gauge, then disaster.

Optimism has turned to doubt with European Central Bank President Draghi’s bond-buying program doing little to bolster the economy while sowing concerns about bank profitability. To Benedict Goette of Crossbow Partners, the odds of another crisis are higher than a rally to fresh records.

“The 2009-2015 rally originated from two main drivers: a massive stimulus, and credit expansion in China,” said Goette, who’s a partner at his firm in Zug, Switzerland and helps oversee 1 billion Swiss francs ($1 billion). “European earnings have not followed suit so far. Skepticism regarding central-bank operations has started to emerge.”

Even with a recent rebound, the Stoxx 600 remains 6 percent lower for the year, and strategists are predicting the gauge will end 2016 at about the same level where it started. Analysts, who in January called for earnings growth, are now expecting declines of 2.8 percent. Investors have withdrawn money from funds tracking the region’s equities for nine straight weeks, the longest streak since May 2013, according to a Bank of America Corp. note dated April 7 that cited EPFR Global data.

Since last year’s peak, all industry groups in the Stoxx 600 have fallen, with lenders, miners and automakers down more than 25 percent. Traders have had to contend with a rebound in the euro despite additional ECB stimulus, persistently low inflation and slowing growth from China. Fewer than one in five fund managers are confident Draghi’s easing will be a major source of growth for Europe, a Bank of America survey showed April 12.

The Stoxx 600 is trading in a way similar to 2001 and 2008, a “frightening” trend, noted the firm’s technical analysts in an April 11 report. The index, which closed at 343.99 on Thursday, could tumble toward 200 if it falls below 300 like in those years.

Only a global recession would justify such a slump, according to Didier Duret, chief investment officer at ABN Amro Bank NV’s wealth-management unit in Amsterdam. Oil prices have rebounded, a gauge of stock volatility is now down for the year, and data out of China have stabilized.

“Now there’s a completely different picture,” said Duret. “The consumer is still OK, risk perception is declining. The technical situation is positive, when we look at oil and volatility, China stability, all this nasty news from January.”

Even after the decline in the past year, the Stoxx 600 still trades almost 20 percent above its average valuation for the past five years. That’s too expensive, and levels from 2015 were excessive, according to Jasper Lawler, a London-based analyst at CMC Markets Plc.

“It’s not all doom and gloom, but not enough to justify being above those peaks a year ago,” Lawler said. “We were front-running the ECB QE program. It’s a very slow-moving recovery.”

To contact the reporter on this story: Roxana Zega in Zurich at rzega@bloomberg.net. To contact the editors responsible for this story: Cecile Vannucci at cvannucci1@bloomberg.net, Namitha Jagadeesh

©2016 Bloomberg L.P.

bloomberg

 Bloomberg