European shares up on telecom network talk, earnings

Wed Jan 9, 2013 12:41pm GMT

* FTSEurofirst 300 index advances 0.3 percent

* Telecoms gain on talk of pan-European network

* Positive start to U.S. earnings improves sentiment

By Atul Prakash

LONDON, Jan 9 (Reuters) - European shares advanced to trade near a 22-month peak on Wednesday, with talks of creating a regional network boosting telecom shares, while an encouraging start to the U.S. earnings season buoyed investor sentiment.

The STOXX Europe 600 telecoms index, up 1.8 percent, was the top sectoral gainer, with traders citing a Financial Times report saying top telecommunication firms were discussing a pan-European infrastructure network to unite Europe's disjointed national markets as a reason for the rise.

Deutsche Telekom, France Telecom and Telecom Italia were 2.6 to 5.5 percent higher.

"What the share prices reflect now is a chance that these companies could reduce their costs by building a single network across Europe," John Karidis, analyst at Oriel Securities, said.

The telecom sector helped the FTSEurofirst 300 to gain 0.3 percent to 1,163.41 points by 1220 GMT. The index touched a 22-month high this week and is up about 22 percent since a low in June 2012.

Analysts said that the market also reacted positively to U.S. aluminium giant Alcoa's in-line profits and above-consensus revenues. The company said late on Tuesday it was optimistic demand for the metal would continue to grow in 2013.

The report, which kicked off the fourth quarter U.S. earnings season, raised hopes that European companies would also report decent results in the coming weeks.

"The fourth quarter earnings season is expected to be quite strong in the United States. For big European stocks trading globally, you should be able to see some decent read across," Paul Kavanagh, market strategist at Killik & Co, said.

"We are still finding a fertile hunting ground for European international equities on valuation grounds. We like financials because the central banks are giving them enough time to repair the damage."

The STOXX Europe 600 banking index, up 1.5 percent, was the second-biggest sectoral gainer, with Lloyds Banking Group rising 5 percent also helped by a rating upgrade by UBS.

According to Thomson Reuters Datastream, European banks traded on 9 times their one-year forward earnings, against a 10-year average of 9.7 times and below 11.4 times for the pan-European STOXX Europe 600 index.

EARNINGS OUTLOOK

According to consensus estimates, European earnings were still expected to rise about 9 percent in 2013, despite a downward revision in the past couple of months, analysts said.

"Expectations are quite low going into the earnings season as we saw a lot of downward guidance in the past few months. There is potential for an upside surprise to come through," Robert Parkes, equity strategist at HSBC Securities, said.

"We think earnings will grow by about 6 percent in Europe this year. We have got some topline growth coming through and a little bit of margin expansions," he said, adding his forecast was slightly below consensus.

Thomson Reuters StarMine data showed the fourth quarter earnings could even be 0.9 percent above analysts' forecasts.

The stock market's technical outlook also remained positive after recent strong gains. The euro zone's blue chip Euro STOXX 50 index advanced 0.5 percent to 2,705 points, with charts suggesting the index would target 2,735 and 2,765, its highs in July 2011.

Other indicators also suggested investors remained positive on equities. UBS said "risk-on" flows had returned, with investors favouring cyclical stocks. Its client flow activity in December showed the largest buying of peripheral European equities, such as Spanish and Italian stocks, since March 2012.

Among individual movers, J Sainsbury fell 2.3 percent. Britain's No. 3 supermarket met forecasts for underlying sales in the Christmas quarter, though growth did slow from its first half in a highly competitive festive market.