* Outlook for rising stocks hinges on euro zone
* Global economy worries prompt cut to forecasts
* Brazil to lead the way, Italy likely to lag
By Andy Bruce
LONDON, June 28 (Reuters) - Persistent fears about the euro
zone's future and an increasingly subdued global economy will
restrain further advances for the world's major stock markets,
according to Reuters polls of analysts, who slashed their
forecasts.
Equity strategists were badly wrong-footed by last year's
disastrous showing for global stocks. Analysts overestimated
gains in all but one index, and underestimated gains in the Dow.
Following a dire 2011 that wiped trillions of dollars from
global bourses, hopes were high among equity strategists - ever
optimistic - that this year would bring a strong rebound.
That has failed to materialise. And even though analysts
expect all but one of the 20 stock indexes featured in the poll
to end 2012 higher than their current levels, they scaled back
their forecasts from the last survey in March.
A few indexes are expected to recoup the heavy losses
suffered last year by the end of this December.
But for many of the forecasts collected around the globe,
the case for rallying shares is paradoxically based on a belief
that the quagmire Europe finds itself in, and a deteriorating
global economy, will trigger another flood of central bank cash.
"The euro zone crisis continues to cast a shadow on global
markets, but stocks are supported by interest rate tailwinds and
... the Fed's willingness to undertake further easing measures,"
said John Praveen, chief investment strategist at Prudential
International Investment Advisers in Newark.
Central bank balance sheets have exploded in recent years
and there is no sign of any halt to the river of cash being
pumped into banks. That has propped up stock markets, despite
all the economic gloom.
Indeed, only Italian shares are expected to end the year
below their current levels. By contrast, strategists predict
that Brazil's Bovespa will have the best performance of
any major world index, rising 24 percent by year-end.
That prediction comes despite a sharp economic slowdown.
But respondents also warned there is plenty that could snuff
out an expected rally, with the euro zone's sovereign debt
crisis chief among their concerns.
"The euro crisis is a long and tough process that will not
dissolve in the short term. It remains an uphill struggle," said
Markus Reinwand, analyst at Helaba in Frankfurt.
European Union leaders are meeting on Thursday to talk over
how they can solve the debt crisis, which has spread from Greece
to much bigger economies like Spain and Italy.
But with discord between European politicians running high,
hopes for progress are slim, and the crisis was cited as a
depressant for shares by analysts from Shanghai to New York,
where stocks are still expected to gain modestly.
For most of the indexes, the current 12-month forward
price-to-earnings ratio is lower than their 10-year average,
suggesting stocks are relatively cheap. That is one key reason
why many analysts foresee gains despite big economic worries.
As in previous polls, emerging markets are expected to lead
the way, although some developed market indexes look set for
hearty returns over the next 12 months.
The U.S. Dow Jones Industrial Average, Canada's SP TSX, the
pan-European DJ Euro Stoxx and Germany's DAX 30 are among those
that could rise by double digits over the next 12 months.
Japan's Nikkei average will gain 20 percent this year, its
biggest rise since 2005, with investors pinning their hopes on
more policies to tackle the euro zone debt crisis and strong
earnings to entice foreign investors back to Japanese stocks.
RALLY REALISM
Emerging market indexes as a group are expected to gain an
average 13.5 percent for this year, compared with 14.6 percent
in March's poll.
While Brazilian shares are expected to lead the way, India's
BSE Sensex could rise by a fifth over the next 12
months, and likewise for the Shanghai Stock Exchange Composite
Index. Again, the predictions come despite substantial
economic slowdowns in these economies.
But much depends on the euro zone.
"At some point the authorities in Europe are going to have
to act to avoid a collapse," said Luciano Rostagno, chief
strategist at WestLB bank in Brazil.
The SP 500 , which features many of the
world's biggest corporations, is expected to end 2012 about 5
percent higher from Wednesday's closing level of 1,331.85,
representing a rally of 11 percent for the year.
Most European indexes are expected to perform similarly,
although the timing of any rally from here is uncertain.
"There's a lot of emotional pessimism in the market and it's
very difficult to identify exactly which week, month or quarter
that is going to change," said Darren Winder, head of strategy
at Oriel Securities, on Britain's FTSE 100.
"But the stock market does not reflect underlying
profitability - it hugely underestimates it."
Italian equities, hit hard by the euro zone debt crisis and
poor economic prospects, lagged behind every other major stock
index in the poll.
Already 12 percent in the red for this year, they are
expected to decline another percentage point from now until the
end of December.
And that forecast does not capture the tumultuous times the
index may endure in the interim.
"We are tightly tied to the future of the euro," said
Giorgio Mascherone, investment head at Deutsche Bank Italy.
(Additional reporting from reporters in London, Paris, New
York, Tokyo, Shanghai, Sydney, Hong Kong, Johannesburg,
Frankfurt, Milan, Sao Paulo, Toronto, Seoul, Moscow and Mumbai;
Polling by Reuters Polls Bangalore; Analysis by Yati Himatsingka
and Rahul Karunakar; Editing by Catherine Evans)
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