UBS sees turn in earnings cycle

(Reuters) - UBS said it expected a turn in the earnings cycle in Europe, including the UK, as earnings momentum and macro backdrop continued to improve, while consensus estimates for 2009 seemed more reasonable.

The brokerage raised its 2009 year-end target for the FTSEurofirst 300 .FTEU3 index of top European shares to 1,000 from 900.

"For one and a half years, we have been more bearish than bottom-up consensus earnings, but we now believe that we are getting close to the end of the downgrades," UBS analyst Nick Nelson said in a note to clients.

The brokerage upgraded the European investment banks to "overweight" but downgraded retail banks to "neutral."

"Investment banks have underperformed retail banks in the recent rally, they have the best earnings momentum of all 30 sectors and are likely to deliver strong second-quarter results," Nelson said.

Earnings momentum is improving for the retail banks as well, but to a lesser degree, UBS said, adding that it saw the retail banks as later-cycle plays as non-performing loans continue to rise and drag on profitability.

UBS added Deutsche Bank (DBKGn.DE) and Iberdrola (IBE.MC) to its European Key Call list, while removing Societe Generale (SOGN.PA) from the list.

The brokerage anticipates AstraZeneca (AZN.L), Deutsche Bank and Iberdrola to beat consensus estimates, but expects potential downside risk for ABB (ABBN.VX), Rolls-Royce (RR.L), and Vodafone (VOD.L).

(Reporting by Mary Meyase in Bangalore; Editing by Gopakumar Warrier)