DUBAI, May 29 (Reuters) - Western European shares still holdvalue for investors as lagging profit growth plays catch-up withexpectations, HSBC's head of European equities said onThursday, with minimal disruption expected from regionalpolitical uncertainty.
Most European markets toiled behind the rebound seen in theUnited States and other developed nations from the globalfinancial crisis as the euro zone suffered issues whichthreatened to wreck the single currency project, underminingeconomies and the companies operating within them.
Earnings at European firms are now recovering and it is thisprofit growth which will drive market performance in thenear-term, Frederic Leguay told Reuters in an interview at thebank's Dubai headquarters.
"The broad case for European equities is that there is a30-40 percent earnings upside, if we continue the earningscycle, which makes the current valuations quite attractive,"said Leguay, who oversees funds with 7 billion euros of assetsunder management.
Domestic-focused stocks and companies whose fortunes wereclosely tied to a country's economic performance were currentlyshowing the most value, Leguay said.
European banks also were outperforming the market and Leguayis positive on the sector, given the improving profit growth andreturn on equity (RoE), as well as the higher capital bufferspossessed by them, which was reducing costs and risks associatedwith holding the shares.
Overall, Leguay said his funds were currently overweight onFrench and Dutch stocks and underweight for shares in German andItalian companies.
"In Germany, we find value more difficult to find, possiblybecause that country has been where most people have beenprotecting their assets in the last few years," he said, addingFrench firms have been considered bigger risks - and thereforewere cheaper - because of the country's economic performance.
The recent geopolitical tensions in the Ukraine and lastweekend's European elections - which saw widespread support forEurosceptic parties - wouldn't have much impact on Europeanequities.
Neither would next month's European Central Bank meeting asan interest rate move has been priced into the market, unlessthe amount of quantitative easing announced was outside currentexpectations, Leguay added. (Reporting by David French; Editing by Toby Chopra)
HSBC Holdings (HSBA)