GRAPHIC-German shares lead Europe in Q1, rally not yet done
* DAX up 19 pct since December ECB cash injection
* Still good value compared with peers over time
* Periphery cheaper, UK and Netherlands more expensive
By Simon Jessop and Scott Barber
LONDON, Mar 23 (Reuters) - Shares of companies in Europe's growth engine Germany have led a three-month-long European stock rally and may still be a better punt for equity investors than many regional peers.
A poor 2011 for stock markets as investors worried about the threat of sovereign default turned around just in time for a new year surge, buoyed by cheap European Central Bank cash, some improving economic data and a lack of investment alternatives.
While that rally paused in recent days, Germany's DAX index has still gained 19 percent since the ECB first flooded the financial sector with long-term funds in December, against 11 percent for the broader blue-chip Euro STOXX 50 and 8 percent for Britain's FTSE 100, Europe's biggest stock market.
By contrast, German 10-year government bonds, sought as a risk-free shelter from the euro zone crisis, have returned just 1.2 percent in the same period.
Despite its big gains, the DAX does not look expensive against its 10-year average on three commonly used measures: comparing share prices to company earnings, asset values or dividends.
Germany sits bang in the middle of a list of developed Europe peers on a blended average of the three measures, making it cheaper than Denmark, Belgium, Ireland, Sweden, Hungary, Britain, Norway and the Netherlands but more expensive than Poland, Austria, Switzerland, Italy, Finland, Greece, France, Spain and Portugal.
Robert Quinn, chief European strategist at Standard & Poor's Capital IQ, said the DAX had further to run and he expected it to end the year up around 9 percent from current levels, at around 7,700 points.
The index lost nearly 15 percent last year, a move Quinn ascribed to the weight in the DAX of companies whose prices tend to rise and fall with the economic cycle.
"The DAX is more cyclical and got bashed up last year, but has rebounded this year, helped by gains for banks such as Commerzbank etc... but some of the high-quality names such as BMW, still look undervalued," he said.
After a brief pause in a rising trend established in late November, the DAX has resumed its rise and charts suggest more could be on the way.
Philippe Delabarre, technical analyst at Paris-based Trading Central, said he remained bullish on the DAX and had an initial target of 7,355 points, from its current level of around 6,980 points, with a stop-loss at 6,600 points.
Also supportive is a rising 50-day moving average, which helps to maintain buying pressure, and a relative strength index that does not yet look overbought, he added.
The options market, in which investors can protect themselves against a big move up or down, also suggests the DAX rally could be extended.
"At an index level, if you look at the options market, the overall picture since the start of the year is that premiums have come down, as you'd expect them to," said Abhinandan Deb, head of European equity derivatives strategy at Bank of America Merrill Lynch.
As markets have moved higher, volatility has fallen, driving down the cost of options and suggesting investors see no marked change in trend for German share prices.
"Derivative markets are not really pricing in a risk of a sharp pullback in the rally we've seen so far," Deb added.
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