UK profit warnings prompt investor wake-up call

* Tesco, Tate & Lyle woes hit faith in valuation premium

* Price gap relative to Europe will keep closing-strategist

* UK company earnings upgrades already lagging Europe's

By Lionel Laurent and Tricia Wright

LONDON, Sept 23 (Reuters) - Profit warnings and share-priceslides at top UK companies this week have delivered a wake-upcall to investors over Britain's persistent valuation premiumrelative to the rest of Europe.

While the UK is no slouch when it comes to economic growthand earnings recovery - and looks poised to become the first bigeconomy post-crisis to hike interest rates - the strong negativereaction to Tesco and Tate & Lyle's profitwarnings since Monday suggest investor patience is wearing thin.

UK stocks are currently trading at a 37 percentprice-to-book premium relative to the rest of Europe, comparedwith a historical average premium of 17 percent, SocieteGenerale strategist Roland Kaloyan said, leaving little room foroutsized bumps along the road to recovery.

And with positive earnings upgrades on UK companies alreadylagging Europe's - partly a reflection of sector-specific woessuch as London-listed miners and UK food retail - HSBCstrategist Robert Parkes said investor sentiment was turningmore positive about cheaper assets across the Channel.

"The UK did get to quite a premium during the euro zonecrisis ... The market has been de-rating but we still don'tthink it's cheap enough," said Parkes. "The key point is thatthe UK is lagging in terms of earnings revisions."

Strategists see scope for further outperformance bycontinental Europe, where banks and exporters in particular arebenefiting from increased market expectations that the EuropeanCentral Bank will eventually provide a substantial monetarystimulus to dodge the threat of deflation.

At least some of the UK's premium is linked to hopes forcorporate deal-making, which took a hit on Tuesday after newU.S. tax rules dented the takeover appeal of healthcare firmssuch as Shire and AstraZeneca.

The FTSE 100 index is down 1.5 percent year-to-date, againsta 4.2 percent rise for the pan-European FTSEurofirst 300.

COMPANY WOES

With a UK relief rally over Scotland's vote to rejectindependence now firmly in the rear-view mirror, investorattention is expected to shift back to issues such as thefragility of Britain's long boom in cheap credit, which hasgiven a fillip to consumer stocks.

To be sure, some investors were reluctant to draw parallelsbetween the precise reasons behind profit warnings at Tesco andTate & Lyle, saying they were company-specific.

But the strong share-price reactions have highlighted howinvestor faith in selected UK bellwethers is eroding.

Tesco shares were trading at their lowest level for over adecade on Tuesday after the world's No. 3 retailer admitted toaccounting mistakes. On Monday it cut its profit outlook for thethird time in two months.

Tesco had been the darling of the retail sector during twodecades of uninterrupted earnings growth until it lost UK marketshare to fast-growing German discounters Aldi andLidl as well as to upmarket rivals Waitrose and Marks& Spencer.

Food-ingredients specialist Tate & Lyle, meanwhile, saidlingering supply chain issues and a more competitive market forits Splenda sucralose sweetener were to blame for a cut in itsprofit forecasts. Shares have slumped 16.5 percent to levels notseen in three years.

"Unlike perhaps earlier in this cycle, we haven't got a nicewarm comfort blanket in terms of valuation buffer and riskpremium around us, which characterised maybe 2012 and much of2013," said Ian Richards, global head of equity strategy atExane BNP Paribas.

"Anything which threatens that delivery is liable to see asignificant setback in terms of pricing trend." (Additional reporting by Blaise Robinson, Sudip Kar-Gupta andAtul Prakash; Editing by Gareth Jones)