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STOCKS NEWS EUROPE-Schroders upbeat on European shares and banks

Reuters - UK Focus

Investment group Schroders (LSE: SDR.L - news) delivers an upbeat assessment on prospects for the European stock markets in 2014, arguing the region's equity rally should continue as a fledgling economic recovery takes shape and that the banking sector is also more stable than before.

"The European economy has troughed and we are expecting positive GDP and positive earnings revisions from here," says Rory Bateman, head of European and UK equities at Schroders.

"European equities have enjoyed a re-rating recently. However, those gains were largely driven by the European equity risk premium (ERP) coming down from all-time highs as the prospect of a eurozone break-up receded," he adds.

"The ERP remains above its average historic level and normalisation should drive further gains. Moreover, European shares remain good value relative to their own history and when compared to their U.S. and Asian counterparts."

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Bateman adds the region's banking sector - which was hit hard by the euro zone's sovereign debt crisis - should also draw back more investors.

"The ECB will carry out its Asset Quality Review in 2014. Certain individual banks are likely to need extra capital, but overall we anticipate that the exercise will restore confidence and show that Europe's banks no longer pose a systemic risk," he says.

Since the start of 2013, the pan-European FTSEurofirst 300 and STOXX 600 indexes have risen by around 15 percent and 16 percent respectively - underperforming gains of 23 and 27 percent on the American Dow Jones Industrial and S&P 500 indexes, which have hit record highs.

Bateman backs a selective, individual "stock-picking" approach for 2014, with consumer cyclicals as his preferred sector as he feels this part of the market will have the greatest potential for upgrades.

For a chart on asset returns in 2013: http://link.reuters.com/dub25t

Earnings momentum: http://link.reuters.com/xuv52v

Reuters messaging rm://sudip.kargupta.thomsonreuters.com@reuters.net