STOCKS NEWS EUROPE-Goldman favours DM focused cyclical stocks

(Fixes typographical error in headline) Companies that are set to see earnings improve with a pick-up in economic activity are still undervalued compared to history, Goldman Sachs (NYSE: GS-PB - news) says in a note, and are set to see further gains despite a recent rally.

Goldman Sachs favours so-called "cyclical" stocks that are geared towards economic recovery in developed markets, such as Peugeot (Paris: FR0000121501 - news) and Deutsche Lufthansa (Xetra: 823212 - news) , as having the most potential for re-rating and better earnings.

"This group of companies has performed well since March 2013 just as the European data, especially the PMI surveys, have picked up... We expect this to continue to be the case," analysts at Goldman Sachs write in a note.

"We believe that risk aversion will gradually normalise and that economic growth will improve, and consequently that the companies in these high earnings growth bands potentially offer especially interesting opportunities for investors."

The investment bank reckons companies with emerging market exposure, by contrast, will continue to underperform. They have underperformed the DJ Stoxx Europe 600 by over 5 percent year to date, and Goldman cites a spate of recent profit warnings from companies citing emerging market exposure as a reason to steer clear of such stocks.

Reuters messaging rm://alistair.smout.thomsonreuters.com@reuters.net