Europe-focused firms seen offering value as last to join rally

Fri May 10, 2013 8:56am EDT

* Europe's domestic stocks at 30 pct discount vs exporters

* Investors looking for laggards in year-long rally

* Politicians' shift to growth could help the trade

By Toni Vorobyova

LONDON, May 10 (Reuters) - Risk-seeking investors are dipping their toes into Europe's domestically-focused companies - the last firms to have resisted a broad equities rally - gambling that the recession-hit euro zone economy is due a rebound.

Europe's builders, telecoms and media companies, which make most of their money in their domestic markets, have lagged the market for the past five years, leaving them trading at a discount of around a third to the region's exporters.

But, say some, the reasons for such a steep discount are fading. While economists polled by Reuters think the euro zone shrank in the first quarter, recent data from the bloc's biggest economy, Germany, has beaten forecasts.

"It's time to look and see if there are stocks that are exposed in terms of business to the European GDP, where the market is not discounting a lot of recovery and the valuations are extremely cheap," said Fabio Di Giansante, senior portfolio manager at Pioneer Investments.

He is playing this theme by investing in French building materials company Saint Gobain, which has said it expects a recovery in earnings in coming months after a harsh winter, and construction firm Vinci.

A basket of Europe-focused companies, compiled by Reuters from picks by Citi, Credit Suisse Goldman Sachs and JPMorgan, trades on a median 15.4 times current earnings - a third cheaper than exporters.

The Europe-centred firms, which heavily feature banks, media, transport, builders and utilities, also offer 50 percent more income, with a median dividend yield of 3.87 percent.

POLITICAL BOOST

Apart from price, investors highlight improving economic fundamentals as a reason to enter the trade now.

"We don't expect growth will pick up materially and quickly in the euro zone, but we might be at an inflection point where most of the severe fiscal adjustment is behind," said Emmanuel Cau, strategist at JPMorgan.

His bank recommends buying a basket of Europe-focused cyclicals - including airport manager Fraport, Spanish infrastructure firm Abertis and Belgian cable operator Telenet - against globally-centred peers.

Some analysts see recent calls by several euro zone leaders for greater emphasis on growth-friendly policies as potentially boosting the appeal of companies operating within the bloc.

"If we see more of that, the domestic plays which are certainly more attractively valued, would be somewhere where we would tell our clients to go," said Frederique Carrier, head of European equities at RBC Wealth Management.

Exporters, meanwhile, are facing pressures from the currency market. A steep depreciation of the yen is making it harder for German firms to compete on price against Japanese peers.

The powerhouses of China and the United States, key export markets, are ticking along, but given the low expectations of Europe, it, arguably, has more potential for positive surprise.

Such bets clearly come with risk and the more cautious investors are still expected, despite the expense, to stick with more stable defensive sectors like healthcare, which tend to be cushioned from swings in economic climate.

There are signs though, that those willing to take some risk are starting to shift into domestic euro zone bets, which are up 9.2 percent in the past month against exporters' 6.4 percent.

"If you want to have risk in your portfolio, you want to have domestic exposure to the euro zone," said Cau at JPMorgan. (Editing by Nigel Stephenson)