* UK shares set to benefit from defensive nature, recovery
* UK set for earlier recovery than mainland Europe
* Investors look to UK once stock rally subsides
By Simon Falush
LONDON, June 4 (Reuters) - British stocks are set to benefit from their defensive status once the current stock market surge has run its course, reversing outperformance by more cyclical continental Europe.
Britain's FTSE 100 has gained 26 percent since it reached a six-year trough on March 9, underperforming the pan-European FTSEurofirst 300 which has rallied 35 percent and Germany's DAX which has surged 42 percent.
As long as the rally continues, the British benchmark's relatively large defensive weighting -- sectors like pharmaceuticals and tobacco -- and a dearth of cyclical industrials means it will continue to lag its continental peers.
But analysts say the stock surge has shaky foundations.
"The rally that you've had has been based on hope rather than real results coming through. Confidence levels have gone from despondent to disappointing," said Justin Urquhart-Stewart, investment director at Seven Investment Management.
"We're getting further and further out on this plank and I'm getting worried about what's actually sustaining it."
The quantitative easing from the Bank of England and the Federal Reserve will ensure that the recovery in the UK and United States will be earlier and more pronounced than that seen in Europe, which has been slower and more tentative in implementing measures to kick-start the economy.
"It comes down to macro outlook," said Philip Lawlor chief portfolio strategist at Nomura. "I still have a conceptual problem with Europe. The ECB has been behind the curve, they don't have the armoury to go to full-blown quantitative easing."
Europe benefited from an initial euphoria when investors realised that a complete meltdown in the global economy would be averted but the next stage of the recovery will see it struggle, analysts said.
"The market is going want to move into areas where recovery is coming through," Lawlor said, adding that the UK should see recovery faster than continental Europe.
Indeed the UK PMI data released on Wednesday that showed Britain's service sector staged a surprise return to growth in April while data the same day showed euro zone economy shrank more in annual terms in the first quarter than thought.
DEFENSIVES VS CYCLICALS
In 2008, the defensive nature of the British benchmark saw it outperform, falling 31 percent versus a 40 percent slump from Germany's DAX, and investors are likely to want to move back into the more defensive index as confidence ebbs again.
The largest UK defensive stocks are the pharmaceutical giants GlaxoSmithKline and AstraZeneca while tobacco company British American Tobacco and supermarkets like Tesco are also seen as safe havens.
The DJ STOXX European healthcare sector has fallen 7.9 percent this year compared to a gain of 5.2 for the wider index, but fell 18.8 percent in 2008 when the FTSEurofirst 300 lost 40 percent.
As long as the stock market rally persists, being overweight continental Europe seems to be the logical course to follow.
"At the moment our favourite region is continental Europe, " said Kevin Gardiner, head of Global Equity Strategy at HSBC Investment Bank.
"We think if risk appetite returns the riskiest markets will do best and so the fact that the UK has more defensives than Europe and the fact that the Germany has lots of cyclical stocks, these things start to argue for continental markets doing better than the UK."
He noted the weighting of the industrial sector in the UK was about 4-5 percent compared to continental Europe where it was around 13 percent.
"If people want cyclically exposed companies with the idea that the global economy will stabilise and want to buy economic exposure generally then there is more of that to go for in continental Europe than the UK, and by a long way," Gardiner said.
The trigger for a move back into defensive stocks and an overweight in UK equities will be a return to data and corporate results that match, rather than beat expectations.
"You need upside surprises to continue for the rally to continue," said Ad van Tiggelen, senior strategist at ING Investment Management at ING in the Hague.
"As soon as data comes in line or below expectations, that will be a catalyst for a bigger correction. That could take a few weeks or a few months."
(Editing by Sitaraman Shankar)