LONDON, Jan 12 (Reuters) - U.S. investors may finally return as buyers of European stocks following a marked improvement in the outlook for corporate earnings in the region, which are seeing the most upgrades from analysts in nearly seven years, according to UBS.
Commodity prices, a lack of inflation and exposure to emerging markets were headwinds for European companies in recent years, but are turning into reasons to be optimistic on Europe, strategists at the Swiss bank said in a note to clients.
The improving backdrop saw U.S. investors turn net buyers of European stocks via exchange traded funds (ETFs) in December, breaking a nine-month-long streak, the bank said, based on its proprietary data.
Prospects of better growth and profits in other markets, particularly in the United States, and a sluggish economy and political uncertainty in Europe have until now dimmed the appeal of the region's equities, which were among the worst performers among developed market peers last year.
Europe's STOXX 600 fell 1.2 percent in 2016 compared with a 9 percent rise for the S&P 500.
Since December, U.S. investors have pumped $3.6 billion into European equities via ETFs. Outflows in the nine months prior to that stood at $35.8 billion.
The brighter earnings outlook in Europe is underpinned by better demand rather than cost cuts, an important sign that the upgrades could continue.
"Earnings upgrades are finally being driven by revenue upgrades - the best in 17 months," UBS's equity strategy team led by Nick Nelson wrote.
Robust euro zone PMI data showed that businesses grew at their fastest pace in more than five years in December, while figures for euro zone manufacturing activity were also solid.
Mining companies, auto makers and banks were the sectors seeing the biggest analyst upgrades, UBS said. (Reporting by Kit Rees)