* 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 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
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
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.
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
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)