European shares inched to fresh two-and-a-half year highs yesterday as strong gains from drug makers like Elan and Shire Pharmaceuticals offset weak mining stocks, which retreated in step with metal prices.
Anglo American and BHP Billiton shed between two and four per cent as a stronger dollar knocked confidence in major base metals, with Xstrata hit harder after its Australian target WMC Resources said it was worth 30 per cent more than Xstrata's hostile bid.
But the surging dollar and tamer oil prices drove car makers higher, with Peugeot up two per cent and Volkswagen also 2.4 per cent higher despite reporting a six per cent fall in car sales in China in 2004 and predicting a tough 2005.
The FTSEurofirst 300 index of pan-European blue chips was 0.2 per cent firmer at 1,049.8 points, its highest closing level since July 2002. The narrower DJ Euro Stoxx 50 index was up 0.04 per cent at 2,971.1 points.
After notching up a gain of about nine per cent in 2004, many investors are expecting a similar return in 2005, although earnings growth is expected to slow.
"We expect reasonably good returns from European equities in 2005 supported by strong balance sheets, high cash returns to investors, reasonable valuations and a relatively benign global economic backdrop," strategists at Goldman Sachs said in a note, forecasting total returns of 8-10 per cent.
ABN Amro strategists also expect European equities to perform well, particularly in the first quarter of 2005, as investors favour stocks over other assets and increase their exposure.
Around Europe, London's FTSE 100 index was 0.7 per cent firmer, while Paris's CAC 40 gained 0.2 per cent and Frankfurt's DAX was flat. The Swiss Market Index added 0.1 per cent in Zurich.
Woolworths was a weak spot in London, down 5.6 per cent after the toys-to-sweets chain reported flat same-store sales in the four weeks to January 1 and said annual profits were likely to come in below analysts' expectations. UK retail giant Tesco was down 1.2 per cent.
Energy stocks underperformed after crude prices extended declines sparked by mild winter weather in the United States. BP was down 0.6 per cent, while France's Total was 0.4 per cent weaker.
On the upside, Shire Pharmaceuticals rallied 5.5 per cent after the UK drug maker announced a deal to develop a new treatment for hyperactivity with a US firm, while Irish drug maker Elan surged seven per cent on expectations of a strong year for the group on the back of its new multiple sclerosis drug, Tysabri.
On Wall Street, the Dow Jones industrial average was 0.04 per cent higher at 10,733.4, while the technology-laden Nasdaq Composite Index was down 0.8 points at 2,135 after brokerage downgrades on internet retailer Amazon.com and computer maker Dell.