Ample cash to boost European equities rally

A trader reacts at his desk at the Frankfurt stock exchange June 11, 2012.

LONDON (Reuters) - European shares, rallying on a bailout for Spanish banks but still cheap by some measures, could potentially rise further as investors seek opportunities to offload cash piles that have grown as the euro zone crisis has deepened.

European shares .FTEU3 rose to their highest in nearly one month on Monday after European ministers agreed over the weekend to lend Madrid up to 100 billion euros (80 billion pounds) for its bank rescue fund.

Although analysts remained sceptical about how far such bailouts help to resolve the increasingly complex crisis, they said it could be a milestone and the start of more bold responses from policymakers.

Further signs of a coordinated policy response to alleviate the debt problems and boost global growth could prompt investors to try putting the ample cash lying on the sidelines to work by buying riskier assets such as equities, analysts said.

"There is certainly enough cash available to witness a major rally in equities. The euro zone's move to help Spain to bring its battered banks into order has improved sentiment and may encourage people to offload a part of their cash holdings," Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets, said.

Even so, "investors would like to see more concrete actions from the European leaders before getting convinced that things are really changing."

Data on total cash held by investors across Europe is not readily available, but surveys suggest the amount has surged. A Thomson Reuters poll of 15 European fund management firms outside Britain found cash accounted for 12.5 percent of their balanced portfolio in May, the highest in at least two years.

Among 15 UK firms, cash holdings rose to 8.5 percent last month from 6.5 percent in April and 5 percent in March.

The STOXX Europe 600 index .STOXX rallied by 4 percent and 3.9 percent respectively in January and February after the cash holdings rose to about 10 percent of the portfolio in December, a level seen for the first time in 2011.

"People are sitting on huge amounts of cash and waiting for the right moment to put it to work. We could see a strong rally in the third quarter, provided there is a prolonged low level of volatility," said Didier Duret, chief investment officer at ABN-AMRO Private Banking, which manages about 170 billion euros.

Duret said he was overweight cash, which was now at around 16 percent of his managed portfolios, against a historical average of between 5 to 10 percent.

Equities can also be seen as cheap. The STOXX 600 index, which hit a 5-month low in June and has fallen 7 percent this quarter, trades at 9.5 times its one-year forward earnings, the lowest in 2012. That compares with its 10-year average of 12.5 and the current ratio for the U.S. S&P 500 .SPX of 11.8 times, according to Thomson Reuters Datastream.

"We will use cash to add to equity holdings if opportunity arises. I think we are in the last innings of the debt crisis as leaders are facing the precipice and will be forced to act," said Ion-Marc Valahu, fund manager at CLAIRINVEST in Geneva, whose cash holdings are quite high at around 25 percent.

(Editing by Ruth Pitchford)