LONDON, Sept 11 - The German and French stock markets have reached their peak for this year, but further signs of economic recovery and a weaker euro could push them modestly higher, according to quarterly equities poll. Banks, the heavyweights of most indices, were singled out as undervalued and likely to go higher, whereas some felt rallies in cyclical and technology stocks had run out of steam. "There's been too much bullishness and it's probably time for a moment of reflection," said Geert Noels at Petercam in Brussels. The mid-range of 17 forecasts in the September 4-8 poll saw the DAX index <.GDAXI> of 30 German blue chips finishing the year at 3,650 points, up three percent from Wednesday's close of 3536.9. The index has already jumped 22 percent this year. France's benchmark CAC-40 index, up nine percent so far this year, was expected to end 2003 at 3,500 points, five percent above its 3,328.7 close on Wednesday. After slumping for the third year running in 2002, the Paris and Frankfurt indices have staged a recovery based on signs that business confidence is reviving around the world. But strategists said much of the good news -- including the effect of a stronger economy on future earnings -- had already been priced in, limiting the scope for more rises. "We are quite optimistic on profits still, but I think the market kind of knows about that now," said Adrian Jarvis at Morley Fund Management in London.
BANKING ON REFORMS Long-term reforms of pension and welfare systems in France and Germany to revitalise Euroland's two biggest economies may boost stocks. "One major criticism which has been addressed to Germany and France was the lack of reforms. (Now) nobody can complain about the implementation of reforms," said Alain Bokobza at SG Securities in Paris. Large European companies could also benefit from a softening euro , which has retreated from record peaks above $1.19 in May and June. "While this year U.S. companies have been benefiting from the weakness of the dollar, maybe next year that (dollar recovery) could help the Europeans," said Gert de Mesure at Delta Lloyd Securities in Brussels. The consensus saw the CAC-40 reaching 3,600 points by end-2004 and the DAX edging up to 3,850. Of the sectors, banks were seen as most likely to do well. "Especially in Germany, the financials should underpin the market, benefiting from the general improvement of economic and financial conditions," said de Mesure at Delta Lloyd. Highly volatile tech stocks, this year's stars so far, were by contrast expected to slow down. "We need a major reacceleration of corporate investment this year for tech stocks to continue to outperform and I think that's not in the pipeline," said Bokobza at SG Securities. The cyclical sector, spanning from Europe's biggest travel firm TUI AG to French luxury goods group LVMH, was also seen slowing down after cashing in on consumers feeling richer. Since January, the DJ Stoxx euro zone cyclical goods and services index <.SX2E> has jumped around 19 percent. "We were very keen on cyclicals a few months ago, but...in our view this is a rally that's pretty mature," said Jarvis.