HOW TO PLAY IT: Wading back into European equities

By David Randall

NEW YORK, Jan 18(Reuters) - After more than three years ofcrisis, Europe's days as a no-man's land may be coming to anend.

The Euro Stoxx 50, an index of blue chip European stocks, isup more than 30 percent as of Thursday from the low it hit onJune 1. It gained a total of 11.2 percent in 2012.

Driving this rally is the pledge by the European CentralBank to support the euro by any means necessary. It lowered therisk that Greece would leave the euro zone and potentially breakup the currency union, and drove bond yields in Spain down fromcrisis levels.

With fears of a worst-case scenario subsiding, institutionalinvestors have been increasing their allocations to Europeanstocks, according to a Bank of America Merrill Lynch surveypublished Tuesday.

Analysts and portfolio managers say that the push is moreakin to wading back into the pool than taking a full dive. Withan unemployment rate of 11.8 percent and an economy that shrunkby 0.1 percent in its most recent quarter, this may be a time tocautiously add exposure to the euro zone, rather than try tochase the market.

Here are ways these U.S. fund managers and financialadvisers are increasing stakes in Europe.

BUYING SELECTIVELY

Even after the market's 2012 rebound, financial andindustrial stocks look attractive on a valuation basis, saidChad Deakins, portfolio manager of the $280 million RidgeWorthInternational Equity fund. Deakins has about 65percent of his assets in European stocks now, compared with lessthan 60 percent at the beginning of last year.

Deakins is focusing most of his portfolio on Germany andFrance, but maintains that it's still too early to increaseexposure to companies in Spain, Portugal or Ireland, which havehigher unemployment rates and financially strapped governments.

Among his picks: French bank BNP Paribas SA andAustrian bank Raiffeisen Bank International AG, bothof which trade at price to book ratios of 0.73 or below and forless than 9 times earnings. Deakins says each bank should tradeat 1.5 times book value.

Raiffeisen has particularly attractive growth prospectsbecause it makes loans in emerging European markets like Poland,he said. The company is already up 6.1 percent for the year, andcomes with a dividend yield of 3.1 percent.

Deakins has also been buying shares of industrial companiesthat have exposure to emerging markets like China and India,such as German chemical company BASF, Frenchtire-maker Michelin, and French energy company TotalSA.

Other fund managers are eschewing European industrialcompanies for pharmaceutical, telecom and utilities stocks thathaven't rallied as sharply as financials and consumer stocks.

"The volatility in Europe over the 12-month period createdvery good entry prices," said Suzanne Hutchins, a portfoliomanager of the $81 million Dreyfus Global Real Return fund.

Hutchins, who recently increased her stake in Europe to 19percent of assets from 13 percent of assets in April as part ofa global increase in riskier securities, is focusing oncompanies with large dividends and strong cash flows. Among herlarger positions: British pharmaceutical GlaxoSmithKline PLC, Swiss biotech Roche Holding AG, and Frenchpharma company Sanofi. Roche, for instance, offers adividend yield of 3.4 percent and is up 23.7 percent over thelast year through Thursday.

FUND OPTIONS

Some financial advisers are opting for funds over individualsecurities. Tony Zabigeala, vice president at Strategic WealthPartners in Seven Hills, Ohio, recently increased his stake inEurope to 25 percent of assets from 10 percent of assets.

Zabigeala invests in Europe mainly through the SPDR EuroStoxx 50 ETF (FEZ), a $1.4 billion fund that costs 29 cents per$100 invested and yields 3.7 percent.

"We expect to see a leadership change from U.S. equities toeurozone stocks this year," Zabigeala said.

Investors in the fund should note that it excludes holdingsin the U.K. and Switzerland, which "magnifies its exposure tothe weakest members of the euro zone, including Italy andSpain", noted Alex Bryan, a fund analyst at Morningstar.

Another euro bull is Will McGough, vice president ofportfolio management at Stadion Money Management. McGough loadedup on European stocks, boosting his fund's exposure to 21percent of assets from 4.9 percent of assets in the $13.5million Stadion Olympus Fund between April andDecember. The fund, which aims to follow market momentum, holdsa basket of ETFs instead of individual shares.

McCough has been buying shares of the $4.1 billion iSharesMSCI Germany ETF (EWG), targeting exporters that benefit fromemerging market growth and the U.S. economy. It costs 53 centsper $100 invested and yields 2.3 percent. The fund is up 24.6percent over the last year, according to Morningstar.

"Basically last year Europe went into a bear market in thefirst half of the year, and we're still seeing the recovery fromthat," McCough said.