Hungry investors scour leftovers of European stock rally

* European equity valuations at highest since 2008

* Banks, oil and basic resources are cheapest sectors

* Investors bet on stimulus-driven rebound in laggards

By Francesco Canepa

LONDON, March 17 (Reuters) - A 15 percent rally in European shares this year has driven valuations to seven-year highs, leading investors to seek whatever bargains are left in distressed sectors such as banks and mining.

The rally, fuelled by the European Central Bank's asset-purchase progamme, has pushed the average price-to-book multiple on the STOXX Europe 600 index to around two, its highest since 2008.

The biggest premia are seen on exporters, such as consumer goods companies, which benefit from the weak euro.

Apart from technology and utilities, only three sectors - banks, oil & gas and basic resources - still trade at a clear discount to their historical multiple, reflecting pessimistic market assumptions about future earnings.

Banks' profits have been curbed by years of deleveraging, while energy and materials companies have been hit by slumps in the price of oil and other commodities such as iron ore and copper.

While none of these long-standing issues is expected to disappear overnight, some investors, faced with limited potential upside elsewhere, are venturing into these sectors, lured by the relatively low valuations and betting the companies should benefit from a stimulus-fuelled economic recovery.

"If you're a value investor like I am, you have the temptation to become contrarian and go into these laggards," said Marc Renaud, chairman of asset manager Mandarine Gestion.

Renaud has been building positions in banks such as Austria's Erste and Italy's UniCredit (Milan: UCG.MI - news) , as well as in steelmaker Arcelor Mittal, while also starting to buy into companies exposed to the oil services sector and raw materials processing.

Share (LSE: SHRE.L - news) prices in these sectors have started to react.

While banks, oil & gas and basic resources stocks have underperformed the broader market in 2015, they are still up between 5 percent and 10 percent since the turn of the year.

The other historically undervalued sectors are less appealing by comparison. While tech stocks are trading slightly below their long-term average, which is distorted by the dot-com boom, in absolute terms they are still one of the most expensive sectors in Europe, at nearly four times price-to-book. Utilities are seen as exposed to political risk in some countries, like the UK, and poorly positioned to benefit from cyclical recovery.

EURO ZONE RECOVERY

A key part of the rationale for going against the grain and buying companies exposed to Europe's domestic economy is the assumption that, eventually, the ECB stimulus of more than 1 trillion euros by September 2016 will filter through to consumers and companies.

The largest upside is seen in peripheral markets such as Italy and Portugal, where shares underperformed last year and the economy has yet to fully recover.

"We are trying to capture the recovery," Damien Kohler, chief investment officer for small and mid cap European equities at BNP Paribas Investment Partners.

"If central banks go on like this, where are people going to put their cash? People are going to consume, at least those who can afford it."

BNP Paribas IP's recent investments include Italian asset manager Mediolanum and, in Portugal, mail services and postal bank CTT and mobile operator NOS, Thomson Reuters data showed.

Euro zone banks, trading at a 20 percent discount to the value of their assets, are seen as pricing in the worst after years marred by high litigation costs and economic austerity.

"For banks, we have already had some austerity, we've seen the bulk of litigation charges and they are genuine plays on a European recovery," said Manu Vandenbulck, senior portfolio manager at ING Investment Management, who has been building positions in the sector. (Reporting by Francesco Canepa; Graphics by Pierpaolo Galli and Francesco Canepa; Editing by Mark Trevelyan)