* Equity markets seen extending rally
* Low P/E ratios seen as support
* End of stimulus packages could dent markets
By Simon Falush
LONDON, Sept 16 (Reuters) - European equities have sprinted higher at lightning pace from multi-year lows hit in March and analysts say the rally has further to go, supported by valuations and government stimulus packages.
"The market can go materially higher from here. Pharmaceuticals, telecoms and oil stocks are trading 20-30 percent, and sometimes more, below their through-the-cycle multiples," Darren Winder, head of macro strategy and research at Cazenove.
"A rotation towards these stocks is likely to materialise over the next few months and these stocks can add large amounts of index points to the market," he said, adding a 10 percent gain over the next two quarters was likely for European markets.
Europe's FTSEurofirst 300 has soared 55 percent since touching a lifetime low in March, and breached the 1,000 mark on Wednesday for the first time since October 2008.
But the index is still 13.7 percent below the level hit before Lehman Brothers collapsed last September and nearly 40 percent below a peak set in mid-2007, and analysts see scope for gains of at least 10 percent more over the next two quarters.
Price-to-earnings ratio -- a valuation measure -- were still well below their long-term average in certain sectors, said Winder.
Also helping high yielders would be the rotation back into equities from asset managers that got left behind in the rally since March, which has seen global stocks up nearly 68 percent.
Reuters data shows that, for August, global investors had 57.1 percent of their assets in equities, less than the 59.3 percent average of the last five years.
A move back to the average would see billions of dollars injected into equities from cash and bonds.
STEROIDS WITHDRAWN
Britain's FTSE 100 pushed through a technical barrier at 5,100 for the first time since September 2008 on Wednesday.
The next technical level is 5,250, said Nicole Elliott, technical analyst at Mizuho Corporate Bank. For Germany's DAX the next significant barrier is 5,866, 3.3 percent higher than the current level.
"The indexes are highly unstable at the moment, it's stimulus packages, that's all it is," Elliott said. Adding that European markets are likly to perform in a similar way to the Nikkei average which is trading at just over a quarter of its peak set in 1989.
"It's like the Nikkei is and has been for the last 20 years ... the long term trend is to lower prices, but fighting against that you've got upward pushes from stimulus packages."
Once the stimulus ends, the questions are likely to begin.
"The market has been fed lovely steroids of investment and stimulation from governments around the world, but the question is, what happens when the stimulus comes to an end," said Justin Urquhart-Stewart investment director at Seven Investment Management.
"Have they thrown enough matches at the bonfire, or do you end up with a rather disappointing plume of blue smoke coming out of the top of a pile of wet leaves?" he said, adding that he saw a likely correction of as much as 15 percent in early 2010. (Additional reporting by Blaise Robinson in Paris, Editing by Sitaraman Shankar)