Wading back into European equities

NEW YORK Fri Jan 18, 2013 1:43pm EST

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NEW YORK (Reuters) - After more than three years of crisis, Europe's days as a no-man's land may be coming to an end.

The Euro Stoxx 50, an index of blue chip European stocks, is up more than 30 percent as of Thursday from the low it hit on June 1. It gained a total of 11.2 percent in 2012.

Driving this rally is the pledge by the European Central Bank to support the euro by any means necessary. It lowered the risk that Greece would leave the euro zone and potentially break up the currency union, and drove bond yields in Spain down from crisis levels.

With fears of a worst-case scenario subsiding, institutional investors have been increasing their allocations to European stocks, according to a Bank of America Merrill Lynch survey published Tuesday.

Analysts and portfolio managers say that the push is more akin to wading back into the pool than taking a full dive. With an unemployment rate of 11.8 percent and an economy that shrunk by 0.1 percent in its most recent quarter, this may be a time to cautiously add exposure to the euro zone, rather than try to chase the market.

Here are ways these U.S. fund managers and financial advisers are increasing stakes in Europe.

BUYING SELECTIVELY

Even after the market's 2012 rebound, financial and industrial stocks look attractive on a valuation basis, said Chad Deakins, portfolio manager of the $280 million RidgeWorth International Equity fund. Deakins has about 65 percent of his assets in European stocks now, compared with less than 60 percent at the beginning of last year.

Deakins is focusing most of his portfolio on Germany and France, but maintains that it's still too early to increase exposure to companies in Spain, Portugal or Ireland, which have higher unemployment rates and financially strapped governments.

Among his picks: French bank BNP Paribas SA and Austrian bank Raiffeisen Bank International AG, both of which trade at price to book ratios of 0.73 or below and for less than 9 times earnings. Deakins says each bank should trade at 1.5 times book value.

Raiffeisen has particularly attractive growth prospects because it makes loans in emerging European markets like Poland, he said. The company is already up 6.1 percent for the year, and comes with a dividend yield of 3.1 percent.

Deakins has also been buying shares of industrial companies that have exposure to emerging markets like China and India, such as German chemical company BASF, French tire-maker Michelin, and French energy company Total SA.

Other fund managers are eschewing European industrial companies for pharmaceutical, telecom and utilities stocks that haven't rallied as sharply as financials and consumer stocks.

"The volatility in Europe over the 12-month period created very good entry prices," said Suzanne Hutchins, a portfolio manager of the $81 million Dreyfus Global Real Return fund.

Hutchins, who recently increased her stake in Europe to 19 percent of assets from 13 percent of assets in April as part of a global increase in riskier securities, is focusing on companies with large dividends and strong cash flows. Among her larger positions: British pharmaceutical GlaxoSmithKline PLC, Swiss biotech Roche Holding AG, and French pharma company Sanofi. Roche, for instance, offers a dividend yield of 3.4 percent and is up 23.7 percent over the last year through Thursday.

FUND OPTIONS

Some financial advisers are opting for funds over individual securities. Tony Zabigeala, vice president at Strategic Wealth Partners in Seven Hills, Ohio, recently increased his stake in Europe to 25 percent of assets from 10 percent of assets.

Zabigeala invests in Europe mainly through the SPDR Euro Stoxx 50 ETF (FEZ), a $1.4 billion fund that costs 29 cents per $100 invested and yields 3.7 percent.

"We expect to see a leadership change from U.S. equities to eurozone stocks this year," Zabigeala said.

Investors in the fund should note that it excludes holdings in the U.K. and Switzerland, which "magnifies its exposure to the weakest members of the euro zone, including Italy and Spain", noted Alex Bryan, a fund analyst at Morningstar.

Another euro bull is Will McGough, vice president of portfolio management at Stadion Money Management. McGough loaded up on European stocks, boosting his fund's exposure to 21 percent of assets from 4.9 percent of assets in the $13.5 million Stadion Olympus Fund between April and December. The fund, which aims to follow market momentum, holds a basket of ETFs instead of individual shares.

McCough has been buying shares of the $4.1 billion iShares MSCI Germany ETF (EWG), targeting exporters that benefit from emerging market growth and the U.S. economy. It costs 53 cents per $100 invested and yields 2.3 percent. The fund is up 24.6 percent over the last year, according to Morningstar.

"Basically last year Europe went into a bear market in the first half of the year, and we're still seeing the recovery from that," McCough said.

(Reporting By David Randall. Editing by Lauren Young and Andrew Hay)

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