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* Global economy on road to recovery
* Germany, Spain, Italy indexes have big cyclical exposure
* UK's FTSE laden with defensives, low beta energy stocks
By Tricia Wright
LONDON, Jan 31 (Reuters) - The global economy is on themend, and for equity investors betting on a recovery throughEurope's share indexes, Germany, Spain and Italy are good plays,while Britain is best avoided in spite of its rude economichealth.
Investing by buying an index tracker fund is a popularstrategy as it can be cheaper and require less research thanselecting a basket of shares.
With the global economy set to grow 3.6 percent this yearcompared with 2.9 percent in 2013, according to a Reuters poll,and signs that the euro zone is gradually improving, aone-and-a-half year rally in European stocks still has some wayto run, analysts say.
Based on recovery prospects alone, Britain looks like a goodbet for investors, as it is the most rapidly improving economyin Western Europe.
But, drill deeper, and its blue-chip FTSE 100 share index has a smaller proportion of cyclical stocks, or sharesmost exposed to the economic cycle, than any other majorEuropean index, at just 65 percent, according to Reuterscalculations.
In contrast, the German DAX, with a highconcentration of auto and chemical stocks, is 81 percentcyclicals.
The DAX hit a record high this month but analysts say solidearnings forecasts for German blue chips means it is stillattractive.
Profits in Germany are seen rising 13.2 percent in the nexttwo years, against a 10.2 percent rise over that period forUK-listed companies, according to StarMine's SmartEstimates -which use the top analysts' forecasts based on accuracy andtimeliness.
"Germany - it outperforms like clockwork when the globaleconomy picks up," said Peter Sullivan, head of European equitystrategy at HSBC, citing it as one of his top picks.
German car parts and tyre maker Continental andautomaker Daimler have rallied around 36 percent and18 percent over the last six months, respectively, against a 13percent rise in the benchmark, while chemical heavyweights BASF and Bayer have gained 18 percent and 17percent respectively.
Spain and Italy's main indexes also offer higher cyclicalexposure than Britain, and within that are likely to see extrabenefits from their high weightings in financials, analysts say.
As the economy recovers, banks' bad debt exposure goes down,and real estate markets eventually pick up, also working in thesector's favour.
"Italy and Spain have come out of recession and willprobably deliver the biggest ... (shift) from a very low levelof growth to a higher level, and a very significant pick-up inearnings as well," JPMorgan analyst Emmanuel Cau, said.
"Banks, which are the biggest weight, will be the driver ofthe upside (in Spain and Italy's equity markets)."
On Spain's IBEX, Bankinter and BancoPopular have leapt around 60 percent over the last sixmonths, compared with an 18 percent rise on the benchmark.
Italian banks UBI Banca and BP Emilia jumped around 70 percent and 50 percent over the period, againsta 17 percent rise on Milan's FTSE MIB.
Yet Banco Popular or UBI Banca, for example, are still 75percent and 50 percent respectively below levels seen before theeuro zone crisis erupted in late 2009.
Banks account for 32 percent of the IBEX and 25 percent ofthe MIB. In contrast, a large chunk of the FTSE 100's cyclicalexposure comes from a 17 percent weighting of low 'beta' energystocks, which stand to gain less when equity markets rise.
Mining shares, whose weakness in 2013 has extended into thisyear, account for another 8 percent weighting in the FTSE andtheir low earnings growth prospects have helped cap the overalloutlook for UK equities.
SmartEstimate's projected profit growth of 10.2 percent forUK companies over the next two years is below the average forDeveloped Europe at 13.6 percent, and far behind Spain andItaly, where earnings are set to grow by more than 20 percent.
That means equity markets in Spain and Italy still lookcheap even if valuations for the IBEX and the FTSE MIB haverisen to 15.5 times and 13.3 times respectively on a 12-monthforward price/earnings basis - against their 10-year averages of11.7 times and 10.4 times.
France's CAC index has average earnings growthpotential, but it has one of the lowest proportions of cyclicalstocks among Europe's major indexes, at 68 percent.
UK CAUTION
Equity strategists at UBS, seeking to lift their cyclicalexposure, recently downgraded their view on the UK to "smallunderweight" relative to their benchmark, preferring Japan andcontinental Europe.
The bank is also "underweight" defensive consumer staples,which account for more than 14 percent of the FTSE 100.
This dwarfs the IBEX's exposure, at 1.3 percent, as well asthe DAX and FTSE MIB at around 5 percent each.
Defensive stocks, whose earnings are reliable because theysell essentials, include Unilever, whose brands includeLipton tea and Dove soap, and drugmaker GlaxoSmithKline.
"We're certainly more cautious on the UK market compared toother European markets given the make-up of the index - thereare greater defensive plays in there compared to Europeanmarkets," Barclays strategist Henk Potts, said.
"Better news on growth, a continuation of reforms andaccommodative European Central Bank policy should create astronger earnings growth profile for European companies," hesaid.
