By Natsuko Waki and Jeremy Gaunt
LONDON, Sept 15 (Reuters) - Europe, long unloved and underowned, is becoming a new lure for investors desperate to boost returns in a low-yielding environment.
It is all down to exposure to robust demand growth in developing economies.
Investing in Europe -- a region saddled with public debt problems -- is no longer just about European fundamentals. Given that a fifth of European corporate revenues come from developing markets, it offers a cheaper alternative to the dynamic emerging markets that have already rallied on huge capital inflows.
This is creating a curious phenomenon where Europe is becoming a "high beta" market, increasingly influenced by changes in global demand and the business cycle.
This means the market is moving in a more volatile manner than others, outperforming benchmarks in a rising market while falling more when markets are going down.
"It's becoming a high-beta market because a lot of corporate earnings in Europe are dictated by what's happening in Asia. Germany, Switzerland and Nordic countries are the biggest beneficiaries of growth in emerging markets," said Alister Hibbert, managing director at BlackRock.
"Europe now offers some of the world's best businesses at low valuations, benefiting from exposure to the most attractive trends within emerging markets."
That trend can be seen from this year's performance. The pan-European FTSEurofirst 300 is up 4.0 percent year-to-date.
Not much for nine months, it is true but it does compare quite well with the 4.5 percent gain that MSCI's emerging market benchmark has put in.
By contrast, U.S. stocks are up no more than 1 percent, if that.
Thomson Reuters data show that beta -- the measure of volatility relative to the broader market -- of European stocks outside Britain hit its highest level in more than 10 years earlier this year.
PROXY TRADE
Busy German exporters, in particular, have been offering opportunities to investors seeking indirect exposure to booming emerging markets such as China.
But there is also a growing spillover from German companies into Dutch, British, Swedish and other regional firms that have become proxies for German growth.
BlackRock's Hibbert says Denmark's Novo Nordisk, the world's insulin maker, is an example.
China's healthcare spending has more than doubled to nearly 400 billion yuan ($58.94 billion) in the past few years, standing at more than 5 percent of total fiscal spending. Novo Nordisk has a 60 percent market share in the Chinese insulin market.
A broader sign that the investor perception of Europe is improving, can be seen in fund manager polls. Bank of America Merrill Lynch showed investors becoming overweight European equities in August for the first time since November and staying that way through September.
Reuters Asset Allocation polls also show exposure to European equities was higher at the end of August than in January and vice versa for U.S. equities.
"Europe is now a cyclical story," said Patrick Schowitz, European equity strategist at BofA Merrill.
EUROPE-BOUND
Not all of Europe is picking up this fair wind, however. French equities in the CAC 40 have fared poorly, down 4.7 percent year to date.
A lot of this can be put down to the mix of French exports, which are less focused than Germany's on the kind of capital goods eagerly being bought by emerging markets.
But the overall trend is moving in Europe's favour.
Aberdeen Asset Management, for example, says it invests in a host of developed European companies that have high exposure to emerging economies.
"If deflation takes hold in the UK, how does that impact the profit of (UK-listed bank) Standard Chartered? It doesn't," said Bruce Stout, senior investment manager at Aberdeen, who also has telecom Vodafone in his portfolio.
"These are the companies which have already made the switch from a domestic to international companies ... It matters where they're getting their revenues from."
Credit Suisse's private bank, meanwhile, recently lifted its exposure to Europe to neutral from underweight based again on the exposure of the region's multinationals to emerging markets. (Editing by Mike Peacock)