Political worries knock European shares off highs

Mon Feb 4, 2013 7:04am EST

* FTSEurofirst down 0.2 percent
    * Political instability knocks Italy, Spain indexes
    * Autos fall with banks cautious after recent run
    * Telecoms dip on div worries, Vodafone down after downgrade
    * Utilities rise, Centrica up on 500 mln stg buyback

    By David Brett
    LONDON, Feb 4 (Reuters) - European shares dipped by midday
on Monday as a near-term risk of a technical sell-off and
political uncertainty in the euro zone prompted a bout of profit
taking with indexes hovering near multi-year highs.
    By 1124 GMT, the FTSEurofirst 300 was down 2.58
points, or 0.2 percent, at 1,165.50, lingering near mid-February
2011 closing highs of 1,187 but off early morning highs. It has
gained 9 percent since November.
    "Markets have been very strong since last November and
technically we are ready for a correction in the short term,"
Nicola Marinelli, fund manager at Glendevon King asset
management said.
    European shares are likely to deliver an average return of
minus 11 percent over the next six months, BNP Paribas's
Love-Panic sentiment indicator showed, with six indicators
signalling a 'strong sell' for an overall 'sell' rating.
    Spain's benchmark Ibex index was down 1.5 percent,
and Italy's FTSEMIB fell 2 percent. They were the
region's major laggards as a corruption scandal in Spain and
uncertainty ahead of an election this month in Italy posed a
threat to the growth outlook for the euro zone region and also
prompted a rise in debt yields. 
    Marinelli said a sell-off would be justified given the
political uncertainty. While he retained long positions in his
portfolio established late last year, he was waiting for a
pullback across all asset classes before putting fresh money to
work.
    "Not putting new money to work has not been a huge pain
because at these levels we are not losing much. A bit of
pullback can only be a healthy thing for portfolio returns," he
said.
    Deutsche Bank said investors were looking for a recovery in
corporate earnings to support further gains with European shares
trading at 12 times price-to-earnings. Over the last six months
I/B/E/S 12-month forward earnings per share forecasts on Stoxx
600 companies have been downgraded by 5.7 percent.
    European auto stocks dropped 1 percent after decent
gains left investors such as Citi and HSBC sifting through the
sector for companies that still offer some value.
    The auto sector was the best performer in Europe in 2012,
surging 38 percent, and since September it has rallied 20
percent, despite continued earnings per share downgrades.
    Over the last six months I/B/E/S 12-month forward earnings
per share forecasts have been downgraded by 12 percent as
European car market fundamentals have deteriorated further.
    HSBC said French car makers face major challenges and
downgraded Renault to "neutral" from "overweight"
after its recent strong share price run, which saw it rise 32
percent since mid-November. 
    Renault fell 1.9 percent.
   
    HUNG UP
    Telecoms shed 0.8 percent with the sector dragged
down by concerns over dividend cuts and with heavyweight mobile
communications firm Vodafone falling 1.8 percent after
Citi downgraded the stock to "neutral" after its recent rally.
    With investors in a cautious mood defensive sectors such as
healthcare and utilities were the main gainers.
    Germany's largest energy group E.ON rose 1.2
percent after traders pointed to the delay of a strike that was
originally planned for Monday, Feb. 4. 
    Suez Environment climbed 2.7 percent after HSBC
upgraded the French water and waste group to "overweight" ahead
of results due on Feb. 14.
    Utility group Centrica rose 0.7 percent after
announcing plans to launch a 500 million pound ($787 million)
share buyback scheme. 
    While investors were in risk-off mode on Monday, data showed
euro zone sentiment improved for a sixth consecutive month in
February with expectations rising to their highest level since
June 2007. 
    Signs of improving sentiment in the euro zone have helped
boost inflows into global equity funds, which attracted another
$18.7 billion during the final week of January, according to
EPFR Global. That has fuelled talk of a long-awaited 'great
rotation' out of fixed income and into stocks.
    "Several factors still favour equities and the performance
relative to fixed income should continue to be positive," Dan
Morris, global strategist at JP Morgan Asset Management, said in
a note.
    "The most important consideration for longer-term returns is
valuations ... Equity valuations have increased over the last
year but remain "good value" compared to the average PE since
1985," he said.
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