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* Large-caps offer shelter in uncertain market environment
* M.Stanley team backs large-caps over smaller stocks
* M&A activity centred in large-cap sector over last month
* ETF data shows flows moving into large-caps
By Sudip Kar-Gupta
LONDON, May 12 (Reuters) - Investors are targeting Europeanlarge-cap stocks, lured by attractive valuations and the refugethey can offer from volatility stemming from such concerns asthe Ukraine crisis.
The move is likely to herald a change in attitude amonginvestors since mid- and small-cap shares have beenoutperforming their larger peers on expectations of an improvingstock market environment.
This could be good news for large-cap stocks such as Frenchoil major Total, U.K. telecoms group Vodafone and German bank Commerzbank, which are currentlytrading at a relatively low valuation.
Anxiety over a slump in emerging markets and clashes inUkraine between the authorities and pro-Moscow protesters havecreated an uncertain geopolitical climate which has seen thepan-European FTSEurofirst 300 index zig-zag betweenlows of 1,263 points and highs of 1,359 points so far this year.
"I am concerned by the Ukraine situation. I think large-capswill protect you more on the downside as they are more liquid,"said Emanuel Arbib, head of London-based Integrated AssetManagement.
Morgan Stanley's European equity strategists this month alsobacked large-cap stocks - often considered as those with amarket capitalisation of more than $5-10 billion - over mid- andsmall-cap stocks.
"After years of underperformance, we believe now is the timeto raise exposure to large-cap stocks as they offer the bestrisk-reward across the market, in our opinion," said MorganStanley strategist Graham Secker.
Secker highlighted relatively attractive valuations forEurope's biggest stocks, with Thomson Reuters Datastream showingthat the price-to-book ratio of MSCI Europe large-cap stocksstands at just under 1.5 - below a price-to-book ratio of justover 2.0 for MSCI Europe mid-cap stocks.
MERGERS BOOST
When the stock market rises sharply, investors often favoursmall and mid-cap stocks as they can surge in value more quicklythan their larger peers, such as during the 1999 Internet boom.
The MSCI Europe Mid Cap Index rose 30percent in 2013, beating a 20 percent rise on the MSCI EuropeLarge Cap Index.
However, when investors are more uncertain about thenear-term market environment, they can favour large-cap stocksdue to the protection they offer in terms of large profits,solid cash-flow and chunky dividend payouts.
Volatility on the MSCI Europe Large Cap Index, as measuredby annualised standard deviation, came in at 2.2 percent overthe last 12 months, compared to 10.3 percent on the mid-capindex, according to data from MSCI's website.
ETFGI, a research and consultancy firm covering the ETF(exchange-traded fund) and ETP (exchange-traded products)industry, said April saw inflows of $515 million into ETFs andETPs covering European large-cap stocks, compared to outflows of$93 million for those covering European small-cap stocks.
Large-cap stocks have had a further boost in the last monthsince much of Europe's merger and acquisition activity has beenconcentrated in that sector rather than among smaller firms.
French manufacturing group Alstom faces bidinterest from GE and German peer Siemens,while UK drugmaker AstraZeneca is being targeted in apossible $100 billion-plus bid from U.S. peer Pfizer.
Morgan Stanley's top picks among European large-cap stocksincluded pharmaceutical group Shire, which has also beena focus of takeover speculation, and UK telecoms operatorVodafone, which has been the subject of possible bidinterest from U.S. peer AT&T.
"We believe this higher level of activity could help unlockthe value in European equities - particularly in the large capmarket in which a lot of value has been evident but that hasremained untapped to date," said Andrew Arbuthnott, head ofEuropean large-cap equities at Pioneer Investments. (Additional reporting by Vikram Subhedar; Editing by FrancescoCanepa, Lionel Laurent and Gareth Jones)
