European shares fall, investors upbeat on 2007

European shares, breaking a 10-day winning streak, but heavyweight investors Fidelity and Barclays Wealth as well as strategists at bank HSBC saw good prospects for European equities in 2007.

Weaker gold and silver prices weighed on mining stocks such as Rio Tinto. Other notable losers included insurer Generali, sugar and sweetener maker Tate & Lyle and telecom operator BR Group.

The euro held below $1.31, helping European exporters such as carmakers, with Volkswagen up 1.6 percent, but credit rating agency S&P said the industry was facing headwinds.

"Softening demand for autos in 2007 will keep competition intense and add to the profitability pressures on global automakers," S&P said in a report. The FTSEurofirst 300 index of top European shares closed 0.11 per cent lower at 1,487.51 points, having set a new 5-1/2 year intraday peak of 1,491.82. The index has risen 16.5 per cent this year and several market watchers voiced confidence about prospects ahead.

"Equity valuations, in absolute and relative terms, still do not look stretched, and we continue to support a modest overweight in equities relative to bonds and cash," Barclays Wealth said in a note.

Above all, shares in big continental European companies are attractively valued at a price-earnings ratio of 13, or a 6.5 per cent discount to the average over the past two years, Fidelity said.

"We are expecting further moderate share price rises," said Trevor Greetham, Asset Allocation Director at Fidelity International in Europe.