By Sarah Turner

LONDON (Dow Jones) - After a dreadful time in 2008, European stocks have started the new year on an upbeat note, but strategists are cautious on when investors should start buying stocks in earnest.

The Stoxx 600 has risen almost 5% in the first two sessions of 2009, taking back some ground lost in 2008 -- the worst year of its history -- when it fell 46%.

A deteriorating global economy and an expected corresponding drop in corporate earnings were behind the sharp fall in equity prices last year.

The global economy is likely to contact further in 2009, but strategists are considering whether equity prices have fallen sharply enough to reflect the fact that earnings will slow or fall.

"Last year was a bear market for prices. We see this as a bear market for fundamentals," said European equity strategists at Citigroup who can see current opportunities in European equity markets.

"Unless the world economy is broken or deflation is to become embedded, then we think that current prices offer investors the opportunity to buy exposure to global GDP -- through European equities -- on the cheap," they said.

Still, they believe there is no need for investors to take excessive risk and continue to recommend investors buy large-cap firms and companies with strong balance sheets. They also recommend a portfolio tilt towards growth, quality and dividend resilience.

Morgan Stanley equity strategists are cautious on European equities for the time being.

"In bear markets, patience is the golden virtue, capital preservation rules," they said, noting that fundamentals are not close to trough levels and valuations are not outright cheap.

They recommend a defensive bias and prefer telecoms, consumer discretionary and energy firms such as Telefonica (TEF), Roche (RHHBY), BP (BP) and Nokia (NOK).

J.P. Morgan equity strategists also like European telecoms as they believe that investors should focus on companies and sectors that are capable of maintaining or increasing dividend payouts.

"With almost zero return on cash and record low yields on government debt, investors are seeking other assets that can provide stable income," they said.

Although they said that recent gains seen in equities could continue for the next few weeks, a collapse in corporate earnings and further hedge-fund redemptions are likely to spook investors further out, they believe.

"2008 forces us to recognize the high uncertainty about the outlook," they said.

The Citigroup strategists said that they believe one of the key trades they think the market will be looking at in 2009 is when to put the risk trade back on.

"For this to happen, the path of economic growth needs to be more certain," they said.

The Morgan Stanley strategists said that next bull market for European equities could start later in 2009 and that that they are watching earnings, U.S. house prices and deleveraging for signals.

"The next bull market could start one-to-two quarters ahead of the trough in earnings or U.S. house prices," they said. The broker expects earnings to fall by 43% by the end of 2009 and U.S. house prices to trough in 2010.

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