Strong insurers, fund buying boost European shares

                                
   * FTSEurofirst 300 up 1.8 pct after Wednesday's 3-month low
                                
 * Insurers bounce back after sharp declines in past sessions
* Charts suggest more gains; hedge funds active buyers
                                
 
                                
 By Atul Prakash
                                
 LONDON, March 17 (Reuters) - European stocks bounced on
Thursday from three-month lows, mainly in technical buying and
as hedge funds scooped up beaten-down shares, with chartists
saying further short-term upside in equities was likely.
                                
 Appetite for riskier assets improved, with the VDAX-NEW
volatility index <.V1XI> slipping about 10 percent after spiking
to nine-month highs this week. But investors remained jittery
following the nuclear plant crisis in Japan. [ID:nL3E7EH18S]
                                
 Insurers, hit hard in past sessions, gained the most as a
top EU regulator said European companies should be able to
absorb the hit from Japan's earthquake. The sector index <.SXIP>
rose 2.9 percent, while AXA <AXAF.PA> gained 4.6 percent.
                                
 The FTSEurofirst 300 <.FTEU3> of top European shares ended
1.8 percent higher at 1,086.74 points after hitting on Wednesday
its lowest since early December. Volumes were 132 percent of its
80-day daily average. 
                                
 "In Europe, predominantly hedge funds are driving the
market. The market was oversold and got to a level that the
buyers were happy to come in, especially in futures, as seen by
the huge jump in volumes," said Adrian Fitzpatrick, head of
investment dealing at Aegon Asset management.
"We have lost focus on what's happening in Europe with the
PIIGS. There will be announcements of profit warnings in the
U.S. over the next weeks. But long-term, the U.S. economy is
growing and most of the strategists are still bullish," he said,
referring to Portugal, Ireland, Italy, Greece and Spain.
                                
 Aegon manages about $80 billion.
                                
 Analysts also said they remained positive on European
equities in the long-run due to the improving economic outlook
in the United States, the reallocation of fund flows towards
equities and attractive equity valuations.
                                
 Europe's STOXX 600 index <.STOXX> trades at 10.8 times
one-year forecast earnings, below a 10-year average of 13.6,
according to Thomson Reuters Datastream, and against a ratio of
13.2 for the U.S. S&P 500 <.SPX>.
                                
 UBS strategists saw a 16 percent upside on the STOXX 600
index <.STOXX) and an 18 percent gain on the FTSE 100 <.FTSE>
this year from the close on March 15.
                                
 
                                
 TECHNICAL OUTLOOK
                                
 Technical analysts said this week's sell-off had left the
Euro STOXX 50 <.STOXX50E> looking extremely oversold, with its
14-day relative strength index (RSI) falling below 30. The index
rose 2.4 percent to 2,786.16 points on Thursday.
                                
 "Today's rally suggests that the uptrend that began last
June is still providing support. Further short-term upside is
possible and a run back up to around 2,852 -- a 38.2 percent
retracement of the recent decline -- is not inconceivable," said
Bill McNamara, technical analyst at Charles Stanley.
                                
 "The index might have fallen in what looks like a straight
line, but similar linear recovery is unlikely."
                                
 Investors stayed jittery on Japan's nuclear crisis. Traders
said markets were choppy in the past days and the quarterly
options expiry on Friday could result in more volatility.
                                
 "We have seen an increase in buying of options to hedge
portfolios. You will be up against it with a lot of time value
priced into premiums, but the rewards could be high," said Ben
Barty-King, head of options trading at ETX Capital.
                                
 Other sectors to gain included basic resources <.SXPP>, up
2.7 percent; industrial goods and services <.SXNP>, up 2.4
percent; and construction and materials <.SXOP>, up 2.4 percent.
                                
 "We're still long equities, although we've reduced our
exposure, and we're still short on bonds. The market has already
priced in pretty bad scenarios, but the global recovery story is
still intact," said Hans-Olov Bornemann, head of the global
quant team and senior portfolio manager, SEB Asset Management.
                                
 His SEB Selection Asset Fund manages 1.37 billion euros.
                                
 
                                
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 Asset returns since Japan quake: http://r.reuters.com/rex58r
                                
 Japanese equity holdings:
                                
  http://graphics.thomsonreuters.com/11/03/JP_OSEQ0311_SB.gif
                                
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 (Additional reporting by Harpreet Bhal in London and Blaise
Robinson in Paris, Graphics by Scott Barber)