Nov. 10 (Bloomberg) -- Investors should increase holdings of European stocks as part of a global equity portfolio as the region typically outperforms when expectations for interest rate hikes increase, said Credit Suisse Group AG.

The brokerage switched from an “underweight” to an “overweight” stance on European shares for the first time since 2007, according to Credit Suisse’s London-based global equity strategist Andrew Garthwaite. The economic recovery in Germany is stronger than the rest of Europe and looks “particularly attractive,” he wrote in a report to clients today.

“Continental Europe tends to outperform when both global lead indicators rise and earnings are being revised up, a combination we expect to continue into the first half of 2010,” Garthwaite wrote. Germany is “aided in particular by its large manufacturing and capital goods exposure.”

Germany’s DAX Index gained 7.6 percent in the six months before the Bundesbank raised interest rates in June 1988 and climbed 3.4 percent and 16 percent before increases by the European Central Bank in 1999 and 2005.

The Standard & Poor’s 500 Index rose an average 8.4 percent in the six months before the last five increases in the Federal Reserve’s target rate for overnight loans between banks and added another 82 percent in the bull markets that followed, Bloomberg data show. The DAX climbed 9 percent half a year before every rate rise since 1988, while Japan’s Nikkei 225 Stock Average posted a return of 8.3 percent in data going back to 1973.

Garthwaite cut his recommendation on Japanese equities to “benchmark” from “overweight,” saying he expects $33 billion of potential capital raising at banks and citing concern about the country having the tightest monetary policy globally.

To contact the reporter on this story: Adam Haigh in London at ahaigh1@bloomberg.net.

Last Updated: November 10, 2009 02:58 EST