ANALYSIS - Growth, valuation to keep Europe share rally alive

By Atul Prakash

LONDON (Reuters) - European equities have a lot more ammunition to fire in 2010 even after an eight-month bull run to new highs, as improving economic data and impressive earnings in the third quarter tempt investors to grab risky assets.

A global economic recovery following the worst financial crisis since the Great Depression of the 1930s raises the risk of an earlier-than-expected withdrawal of trillions of dollars of stimulus packages by governments and central banks across the world, which could be a serious setback for the markets.

But most analysts say that such a situation could only arise after the first half of 2010 and until then European shares could enjoy an easy ride after already surging 60 percent since a lifetime low in early March to a 13-month high this week.

The FTSEurofirst 300 index of top European shares is still down 37 percent from a multi-year peak in 2007, giving scope for further gains in the coming months, analysts said. On valuation grounds also, the market remains quite attractive.

"We think concerns about an impending end of the positive impulses are, however, premature and still consider the setback potential for the equity markets limited, also because the valuation has remained moderate," said Gerhard Schwarz, head of global equity strategy at UniCredit in Munich.

"A sustained increase in volatilities is still not in the cards. In fact, the apparently still very guarded sentiment continues to create scope for positive surprises, for example on the development of dividends," Schwarz said.

In terms of price-to-earnings ratio, shares in the DJ STOXX 600 index trade at around 13 times one year forward earnings, against a 2004 peak of 14 times and a five-year average of 13.5 times, analysts said.

UniCredit is overweight insurance, technology and travel & leisure sectors, but underweight banks, food & beverages and retail.