* European value gap "biggest in the world", says UBS
* Corporate profit outlook best since 2010
* Carmakers, banks, builders seen as good investment
* German blue chips could provide shelter against populism
* Big funds yet to move into European stocks
* Europe vs peers: reut.rs/2kL5YEd
* European earnings outlook: reut.rs/2553txN
By Danilo Masoni and Vikram Subhedar
MILAN, Feb 24 Hampered by persistent political
risks and sluggish economic growth, Europe's equity markets have
disappointed investors for years.
But some fund managers, cheered by the brightest outlook for
European corporate profits since 2010 and valuation discounts
that are becoming harder to ignore, are looking to snap up the
bargains on offer - and taking a particularly close look at
automakers, builders and German bluechips.
Political worries compounded by a series of uncertain
national elections in Europe this year are sometimes cited as a
factor holding investors back.
Yet for those who have drawn lessons from how European
stocks reacted last year to the Brexit vote, Donald Trump's U.S.
election win and a referendum on constitutional reforms in
Italy, time looks ripe to prepare the buying campaign.
While each event caused a market shock, its impact was
increasingly short-lived and the snapback to fresh highs was
"We will aim to take advantage of market volatility to buy
good quality stocks at unwarranted discounts," said Philip
Dicken, European equities head at fund manager Columbia
Threadneedle Investment fund, who expects the economic recovery
in the region to continue and earnings to rise.
Earnings for constituents of the STOXX 600 index
are expected to grow 14 percent this year, according to Thomson
Reuters data, against 10 percent for the U.S. benchmark S&P 500
European stocks have lagged Wall Street over the last five
years, leaving them a tenth cheaper on a price-to-earnings
basis, a value gap which UBS said is the "biggest in the world".
Yet Europe remains an uncrowded market and any jitters ahead
of elections in France and Germany could be buying
opportunities, analysts say.
Morgan Stanley on Thursday recommended investors buy
European stocks and French banking shares, adding that fears of
a far-right presidential election win were likely overdone.
German blue chips look another promising bet. The DAX
, at 13.3 times forward earnings, trades at a discount to
its long-term average valuation of 14.6.
Heavily geared to stocks that benefit from economic
recovery, the index also proved to be a safe harbour when the
euro fell sharply and bond yield spreads shot up during Europe's
sovereign debt crisis six years ago.
As a hedge against a populist vote in France, JPMorgan
strategist Mislav Matejka has recommended investors buy the DAX
and short the French blue chip CAC index. On a price
earnings basis the CAC is 6 percent more expensive than the DAX.
"German equities will be a relatively safe haven within
(the) euro zone into the (French) election if uncertainty
remains and a clear relative winner" in the case of victory by
far-right leader Marine Le Pen, Matejka said.
Others are also upbeat about the DAX, and DZ Bank Chief
Investment Strategist Christian Kahler in Frankfurt expects the
index to climb to record highs this year.
JPMorgan is overweight on autos, financials and energy and
has a buy recommendation on German plays like carmaker Daimler
and insurer Allianz.
Analysts at UBS highlight French builder Vinci and
carmaker Renault, Italian oil major Eni and Norwegian
phone group Telenor as attractively valued stocks that
have lagged the recent rally.
In another sign the tide may be turning, some U.S. funds and
large investment banks have set their sights on Europe, having
been scared away last year by Brexit and Italy's political
Earlier in February BlackRock raised its outlook on European
stocks to the highest possible rating for the first time since
last May, saying risks were overblown.
For now, greater interest for European stocks from the other
side of the Atlantic, where most of the big global investors are
based, has yet to translate into heavy buying.
Europe's busy election year only compounds worries over its
exposure to possible trade wars prompted by protectionist noises
from Trump, but some investors expect that, as the political
hubbub fades, volumes and prices could pick up.
Tempted by bargains on offer in the aftermath of the euro
zone debt crisis, U.S. investors were key buyers of European
equities from 2012 to 2014. And they could make the difference
if they step in again.
Albeit from a low base, global fund managers increased their
exposure to the euro zone in January more than any other
investment category, according to a Bank of America Merrill
"We could be in the early days of a trend," said BlackRock
Managing Director Emanuele Bellingeri, who heads the group's
Exchange Traded Funds business, iShares, in Italy. "Even though
big flows are still missing, conditions for a European revival
are all there".
(Reporting by Danilo Masoni; graphics by Vikram Subhedar;
editing by John Stonestreet)