Bull case for European equities

European equities, as measured by the Stoxx 600, are hovering near record highs, having risen more than 20 per cent already this year.

But there's more to come, as much as a further 40 per cent upside by the end of 2016, reckons Citi.

The bank's equity research team recognises that on a trailing price/earnings ratio of about 20, compared to the average of 15, European stocks are currently not cheap.

But its bull case is based on what it terms a "double-up" market, where returns are boosted by improving growth and a re-rating supported by a number of factors.

One is a better macroeconomic environment as the European Central Bank's stimulus efforts take effect.

Second, the search for yield. Citi notes that 80 per cent of euro-denominated fixed income is yielding less than 1 per cent. Investors watch agog as the German 10-year yield approaches zero.

European equities have "never [been] cheaper in 60-plus years versus credit/bonds".

Next, improving earnings trends will underpin valuations. Analysts have recently been revising earnings forecasts higher.

To ride this extended bull run Citi reckons investors should focus on those stocks with what it terms "positive relative dividend momentum", notably financials.

Preferring cyclicals over defensives, the bank argues investors should be overweight media, tech, travel and leisure, while underweight utilities, food and energy.

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