* Relative value key as markets stutter
* Search for shelter makes safe havens look expensive
* AXA lowly valued compared with German peers
* Tui Travel cheap against Accor on 17 times PE
By David Brett
LONDON, May 4 (Reuters) - European equity markets are expected to trade flat in coming months against a backdrop of the still unresolved euro zone debt crisis but savvy investors may still be able to turn a profit by picking stocks left underpriced in the rush for safety.
Cash pumped into markets by central banks since late last year has helped propel Germany's benchmark DAX stocks index 15 percent higher so far in 2012 and boosted the pan-European FTSEurofirst 300 by nearly 5 percent.
Beaten down basic resources and banking stocks led a rally which began back in December. But as doubts re-emerged about Spain's ability to pay its debts, muddying the outlook for growth, investors pulled back from riskier assets and piled into defensive stocks, such as food and beverages, driving their prices higher.
Equity markets, however, have been in a fairly tight range for the past month, as investors wait cautiously for governments' and central banks' next move, a trend that strategists say could continue over the next few months.
This has left some sectors and companies within sectors relatively undervalued compared with peers and other assets, as valuation metrics such as price-to-earnings (PE) and yields diverge the more investors pile into safe havens.
"Relative value is going to be a good strategy. To some extent people have been hiding in ... highly-rated defensive sectors," said Edmund Shing, European equity strategist at Barclays.
Shing highlighted the underperformance of the oils sectors which has been battered in 2012 on political and earnings uncertainty but, on a PE of 8.4 times and dividend yield of more than four times, looks relatively attractive.
He said oils trade on half the PE of defensive equities, such as food and beverages, and on a yield basis offer more than relatively safe-haven bonds of drug firm Pfizer , which come with a coupon of just 1.8 percent.
"The PE ratings on sectors like food and beverages have gone up and there will come a point where people will rotate, and all it will take is a little bit of visibility and stability at the macroeconomic level," Shing said.
At times of optimisim, investors tend to shift into riskier sectors - cheapened in times of uncertainty - and the positions are then reversed when risk aversion picks up.
On a market implied 10-year earnings per share compound annual growth rate (EPS CAGR), analysts are expecting earnings in the consumer staples sector in developed Europe to grow by 5.6 percent with shares trading on PEs around 16 times. By comparison, the U.S. sector trades on a similar PE but earnings are seen growing 9.9 percent, according to Thomson Reuters StarMine data.
"Staples are trading on a premium to the market and that can only be justified if you take an extremely bearish view on either the U.S. or euro zone recovery," Ewen Stewart, strategist at Investec, said.
The hunger for defensives has left some riskier assets trading on deeply discounted PEs, such as insurers on 7.4 times, as Europe's debt problems have weighed on sentiment.
Justin Haque, a trader at Hobart Capital Markets, said a way to play the insurance sector without betting strongly on a recovery in Europe was to buy French firm Axa on 5.3 times 12-month forward PE with a dividend yield around 7.6 percent, and sell German peers Allianz or Zurich Financial, both of which have a PE of 7 or higher.
Too much uncertainty has been priced into AXA's valuation, which has been hit hard in recent weeks due to a downturn in macro/market sentiment over the possible impact of a change of government in France, Haque said.
Sectors which share a similar consumer base also offer opportunities. Europe's largest hotel group, Accor, trades on a 12-month forward PE of 17.1 times, more than double the ratio for travel firm Tui Travel, despite competing for the same type of customer base and competition in Tui's market waning.
In the UK, food producers Unilever, AB Foods and Tate & Lyle trade on forward PEs of more than 12 times, while the supermarkets are all on less than 10.5 times, despite offering higher dividend yields.
While saying that structural concerns surrounding the retailers remain, Deutsche Bank said: "It's easy for positions like this (the widening PE gap between food producers and retailers) to extend during periods of macro uncertainty. The differential may have widened too far and there is a risk it has turned into lazy positioning."