STOCKS NEWS EUROPE-Old Mutual AM snaps up battered Spanish banks

Europe's financials - almost universally unloved thanks to worries about debt and the fallout from the euro zone crisis - offer a cheap way to bet on a turnaround in equities, reckons an Old Mutual fund manager who has been buying Spanish banks.

Kevin Lilley, who runs the group's European Equity fund, has turned overweight on Spain, buying banks BBVA and Santander which have strong exposure abroad including Latin America, as well as utility Red Electrica.

He is also overweight banks, and over the past month has built up a 3.5 percent underweight in defensive stocks by selling shares in Swiss food group Nestle, which is up 3 percent for the year-to-date.

"Some of these trades have become too stretched because fear has taken over. The market is pricing in an awful lot of bad news and it pays to look through that," Lilley said. "I am not afraid to take a contrarian style."

Lilley is "hoping for more positive developments" from euro zone policymakers in tackling the crisis: "If we get greater clarity, I will increase positions in cyclicals and probably further underweight defensives."

He also reckons that the second quarter earnings season could prove less negative than some expect as analysts' forecasts to a large degree do not reflect favourable developments in other markets. Over the current quarter, the euro is down 6 percent versus the dollar, Brent crude has shed around a quarter of its value and copper is off 13 percent.

The 50 million pound ($78 million) fund, which Lilley took over in December, was down 3.3 percent in the first five months of 2012, against a fall of 4.3 percent on its benchmark, the MSCI Europe ex-UK index. ($1 = 0.6427 British pounds)

Reuters messaging rm://antonina.vorobyova.thomsonreuters.com@reuters.net