European shares boosted by Greek deal

Tue Nov 27, 2012 6:54pm IST

* FTSEurofirst 300 up 0.5 percent

* Banks lead; RBS aided by UBS upgrade

By Tricia Wright

LONDON, Nov 27 (Reuters) - European shares rose on Tuesday after international lenders agreed on lowering Greece's debt, paving the way for the next disbursement of urgently needed aid.

The accord, reached by the lenders late Monday, will cut Greek debt by 40 billion euros, bringing it down to a more manageable 124 percent of gross domestic product by 2020.

The FTSEurofirst 300 was 0.5 percent higher at 1,109.78 by 1246 GMT, after a 0.5 percent decline on Monday ended a five-session winning streak.

Thin volume on the index, at only a third of its 90-day daily average, exaggerated the market's move. Traders said while the Greek deal came as a relief, it was largely expected -- and it's probably just a short-term fix.

"I think the time bomb has temporarily been defused, but it's still not completely inactive," Patrick Moonen, a senior strategist at ING in Amsterdam, said.

"Systemic risks for the euro zone are gradually coming down, meaning that part of the equation is normalizing - and that may lead to higher valuations for European equities, not only in an absolute sense but also relative to U.S. equities."

With the systemic fears abating in Europe, the gap between price-to-earnings ratios of U.S. and European equities tumbled earlier this month to the lowest point in more than six years, signalling a strong reversal in investors' perception of both markets.

According to Thomson Reuters Datastream, the broad STOXX 600 trades at 10.97 times its 12-month forward earnings, versus a price-to-earnings ratio of 12.13 for Wall Street's S&P 500.

The gap of 1.16 between the two ratios is the smallest since May 2006, before the start of the financial crisis in 2007, and well below a 10-year average of 1.93. The gap was 2.6 in September 2011, the depths of the euro zone debt crisis, when the valuation of European stocks fell below the valuation of equities in emerging markets.

BANKS BUOYANT

Banks were the top risers in a broad-based rally as the sector drew strength from the Greek debt deal news.

A near 4 percent advance put Royal Bank of Scotland at the second-top spot on the FTSEurofirst 300 leader board, with the part-state-owned lender also boosted by a UBS upgrade to "buy".

With the Greek problem smoothed over for now, the focus shifts to the threat of the U.S. 'fiscal cliff' -- a set of automatic tax increases and government spending cuts set to come into force in January. Some investors, however, played down the likely impact.

"It will be somewhat of a headwind but I don't think it will derail the U.S. recovery in its totality," said Paras Anand, head of European equities at Fidelity Worldwide Investment, which has 143.7 billion pounds ($230.3 billion) assets under management.

"The market tends to react to surprises ... It's generally something we haven't thought of that surprises us, rather than something like this, which has been coming down the track for so long."

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