UPDATE 1-Utility stocks lead European share index to fresh highs

Wed Sep 11, 2013 12:51pm EDT

* Euro STOXX 50 hits fresh 2-year highs

* Euro STOXX 50 closes up 0.4 pct at 2,863.44 points

* FTSEurofirst 300 ends up 0.1 pct at 1,247.61 points

* 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 said increasing signs that Europe's economy is recovering from the sovereign debt crisis would enable equities to maintain a longer-term upwards trend, even if markets wobble in September on the prospect of a gradual end to U.S. stimulus.

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

The euro zone's blue-chip Euro STOXX 50 index closed up 0.4 percent at 2,863.44 points, its highest closing level since early July 2011.

The broader FTSEurofirst 300 index also ended up 0.3 percent at 1,247.61 points, putting it back within touching distance of a five-year high of 1,258.09 points reached in May. The Euro STOXX 50 is up 9 percent since the start of 2013 while the FTSEurofirst 300 is up 10 percent.

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

Better economic data from Germany and other countries has offset some worries about the impact on European equity markets should the U.S. Federal Reserve start reducing its bond-buying programme at a meeting next week as expected.

"Eurozone firms are more optimistic than they have been for 18 months," said Phil Dicken, head of European equities at Threadneedle Investments, citing a rise in the euro zone's composite PMI to above the 50 threshold marking growth. "This should point to an uptick in earnings."

UTILITIES RISE

The STOXX Europe 600 Utilities Index, which has underperformed the broader market rally this year, rose 1.9 percent to make it Wednesday's best-performing equity sector.

ARM also gave the market a lift with a 4.8 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 signs of an economic recovery were drawing investors back into beaten-down stocks such as utilities.

The European utility sector has only risen 4.4 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 - cheaper 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.

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