POLL-European shares poised to set new highs, buck short-term nerves
* For data, click on
* European equities seen 4 pct up by year end
* Germany's DAX to set another record high
LONDON, Oct 9 (Reuters) - European shares are poised to add 4 percent to this year's strong rally, with Germany's top index on course for another record high as the economic outlook improves, a Reuters poll showed.
Gains were expected to continue through 2014 as Europe benefits from strong fund flows into the region, although worries over the U.S. budget battle and initial paring back of U.S. monetary stimulus may keep markets jittery.
The poll of over 40 strategists predicted the STOXX Europe 600 index would hit a new five-year peak of 320 points by the end of 2013 - beating the target set in a June survey of 310 and taking this year's total gains to more than 14 percent.
That growth rate would slow to about 9 percent next year, however, with the poll showing the STOXX Europe 600 ending 2014 at 348 points.
European equity investors have reaped impressive returns this year on central banks' accommodative monetary policy and gradually improving economic activity in Europe, after several years of anaemic performance.
In the second quarter, France and Germany pulled the euro zone out of recession, and the latest data showed factory activity grew for the third month in September, which should feed into corporate results and drive an increase in share price valuations.
"Performance will be driven by earnings growth and multiple expansion, as confidence in the economic outlook returns, possibly supported by EPS (earnings per share) upgrades in the next 6 months," Martin Moeller, head of global equity portfolio management at UBP, said.
The median finding from the poll predicted Germany's DAX would gain 4 percent to a new life-time high of 8,900 by the end of 2013, then reach 9,188 points by the middle of next year and 9,400 points by the end of 2014.
The DAX, which closed on Tuesday at 8,555.89 points, is just below the June poll's end-2013 forecast of 8,662.
But the index, which has outperformed most major European benchmarks except France's CAC 40 this year, may lag behind in the last quarter.
In the final months of 2013, both the CAC and Britain's FTSE 100 are predicted to rise 4-5 percent to 4,290 points and 6,700 points, respectively.
Italy's FTSE Mib looks set to rise 3 percent by the end of this year reaching 18,925. A further bounce is expected in the first half of 2014, touching 19,950 at the end of June.
Prime Minister Enrico Letta won an important vote of confidence last week and analysts were far more optimistic than respondents to a June Reuters survey, which predicted a rise to 17,025 points at the end of 2013 and 17,925 at end-June 2014.
"The political stability expected following the support secured by Letta's government should be seen as an extremely important development, a game changer which will prompt foreign investors to refocus on the discounted valuations available on the Italian market compared to other countries," said Gabriele Spinelli, head of securities in Italy for UBS investment bank.
The euro zone's blue-chip Euro STOXX 50 index is likely to rise 4 percent by the end of 2013 and further to 3,125 and 3,253 by the middle and the end of 2014, respectively.
Analysts said markets would face mild near-term setbacks in their upward journey, but the overall trend was positive.
"In the short term, the 'shutdown' and the debt ceiling in the United States are likely to increase the volatility in the equity markets," said Gregorio de Felice at Intesa SanPaolo.
The U.S. government moved into the second week of a shutdown as politicians failed to reach an agreement, with a deadlocked Congress also facing an Oct. 17 deadline to raise the nation's borrowing power or risk default.
"Tapering by the Fed can still be a short-term negative but no more than that. The real problem will come when the central banks actually start to tighten, rather than simply reduce the amount of expansion," said Paul Jackson, equity strategist at Societe Generale.
(For other stories from the poll click on )
(Additional reporting by Toni Vorobyova, Francesco Canepa, Sudip Kar-Gupta, David Brett and Tricia Wright in London, Blaise Robinson in Paris and Elisa Anzolin in Milan; additional polling by Swati Chaturvedi and Diptarka Roy; editing by Ron Askew)