DUBAI, May 29 (Reuters) - Western European shares still hold value for investors as lagging profit growth plays catch-up with expectations, HSBC's head of European equities said on Thursday, with minimal disruption expected from regional political uncertainty.
Most European markets toiled behind the rebound seen in the United States and other developed nations from the global financial crisis as the euro zone suffered issues which threatened to wreck the single currency project, undermining economies and the companies operating within them.
Earnings at European firms are now recovering and it is this profit growth which will drive market performance in the near-term, Frederic Leguay told Reuters in an interview at the bank's Dubai headquarters.
"The broad case for European equities is that there is a 30-40 percent earnings upside, if we continue the earnings cycle, which makes the current valuations quite attractive," said Leguay, who oversees funds with 7 billion euros of assets under management.
Domestic-focused stocks and companies whose fortunes were closely tied to a country's economic performance were currently showing the most value, Leguay said.
European banks also were outperforming the market and Leguay is positive on the sector, given the improving profit growth and return on equity (RoE), as well as the higher capital buffers possessed by them, which was reducing costs and risks associated with holding the shares.
Overall, Leguay said his funds were currently overweight on French and Dutch stocks and underweight for shares in German and Italian companies.
"In Germany, we find value more difficult to find, possibly because that country has been where most people have been protecting their assets in the last few years," he said, adding French firms have been considered bigger risks - and therefore were cheaper - because of the country's economic performance.
The recent geopolitical tensions in the Ukraine and last weekend's European elections - which saw widespread support for Eurosceptic parties - wouldn't have much impact on European equities.
Neither would next month's European Central Bank meeting as an interest rate move has been priced into the market, unless the amount of quantitative easing announced was outside current expectations, Leguay added. (Reporting by David French; Editing by Toby Chopra)