European shares hit 2-year highs

Wed Sep 11, 2013 10:53am EDT

* Euro STOXX 50 hits fresh 2-year highs

* Euro STOXX 50 and FTSEurofirst 300 up 0.1 pct

* Utilities and ARM lead market higher

By Sudip Kar-Gupta

LONDON, Sept 11 (Reuters) - A key European equity index scaled fresh two-year highs on Wednesday, lifted by a rebound in beaten-down utility stocks and a surge in chip designer ARM .

Traders also said increasing signs that Europe's economy was recovering from the region's euro zone sovereign debt crisis would enable equities to maintain a longer-term upwards trend, even if markets wobbled in September due to the prospect of less economic stimulus measures in the United States.

Geopolitical risk also eased after U.S. President Barack Obama said late on Tuesday that Russia's offer to push Syrian President Bashar al-Assad to put chemical weapons under international control could potentially head off the type of limited military action he was considering.

The euro zone's blue-chip Euro STOXX 50 index rose 0.1 percent to 2,852.95 points, having earlier hit an intraday peak of 2,863.95 points which marked its highest level since mid-July 2011.

The broader FTSEurofirst 300 index also rose 0.1 percent to 1,244.19 points, putting it back within touching distance of a 5-year high of 1,258.09 points reached in May.

The U.S. Federal Reserve is expected to start reducing a bond-buying programme that has led much of this year's global equities rally at a meeting next week.

However, worries about the possible hit this could have on European equity markets have been offset by signs of economic growth in Germany and other major European countries.

A Reuters poll on Wednesday showed those surveyed felt Europe's economic recovery was here to stay.

"Eurozone firms are more optimistic than they have been for 18 months. The Markit purchasing managers' index rose from 48.7 to 50.5 points, taking it above the threshold marking growth. This should point to an uptick in earnings," said Phil Dicken, head of European equities at Threadneedle Investments.

UTILITIES RISE

The STOXX Europe 600 Utilities Index, which has underperformed the broader market rally this year, rose 1.7 percent to make it the best-performing equity sector on Wednesday.

ARM also gave the market a lift with a 4.1 percent rise after U.S group Apple unveiled a new mobile phone using ARM's latest technology.

Rupert Baker, a European equity sales executive at Mirabaud Securities, said growing signs of a broader European economic recovery were drawing investors back into beaten-down stocks such as utilities.

In spite of Wednesday's rise, the European utility sector has only risen 4 percent since the start of 2013 - less than an 11 percent gain on the broader pan-European STOXX 600 index .

According to Thomson Reuters StarMine data, European utility stocks trade on average at an estimated price-to-earnings (PE) ratio for next year of 11.8 - a cheaper valuation than a corresponding P/E ratio of 13 for the pan-European STOXX 600 index.

The utility sector also has an average dividend yield of 5.7 percent, offering better returns than an average dividend yield of 3.3 for the STOXX 600, according to StarMine.

"It's the value boys and the recovery boys who have got the market at the moment. The whole of last month's rally has been built on recovery stocks such as the utilities, where the dividend yields are still secure," said Baker.