Trust local brokers for top stock picks
* Brokers more accurate on stocks in their own region - StarMine
* Sell when the locals don't buy - Societe Generale
* Germany's Daimler and Spain's Inditex shunned by domestic analysts
LONDON, Aug 8 (Reuters) - Local knowledge is key, it seems, for the best stock tips. Whether in good times or bad, Reuters data shows domestic brokers in European countries are more accurate in their recommendations than their foreign rivals.
Investing in big European companies based on recommendations by brokerages from the firm's home country or region generated higher returns than following institutions based elsewhere over the past three years, despite the locals tending to be more optimistic than average, Thomson Reuters StarMine data shows.
The data compares brokers' buy, sell or hold ratings with what subsequently happened to the rated companies' shares.
Locals outperformed in years when stocks rose but also in a sharply negative year for European shares, such as 2011. This suggests domestic research houses also know best when to sell and challenges a common belief that brokers invariably view stocks in their own market through rose-tinted glasses.
For this reason, any signs local analysts are avoiding a stock may be reason for caution in investors - a strategy Societe Generale's Charles de Boissezon calls "the restaurant test".
"If you're travelling ... I strongly suspect that you're not going to eat at a restaurant full of tourists, but with the locals," de Boissezon, who heads up global equity flow advisory at the French bank, said.
"It's the same with companies. If even the local brokers, who should be more au fait and more inclined to buy that stock, are not buying, then you should beware."
A case study by Societe Generale shows German brokers tended to be the most bullish on German stocks and the least bullish on Spanish shares, while the opposite applies to Spanish brokers.
StarMine data on European blue chip stocks in the STOXX Europe 50 index also showed domestic brokers are more likely to be buyers than their foreign peers when they rate stocks in their own country.
"Home bias is just a manifestation of a broader familiarity bias," Greg Davies, head of behavioural investment philosophy at Barclays Wealth, said. "In most cases, things we are familiar with are the ones we are more optimistic about."
Societe Generale's de Boissezon says this bias can be exploited, for example, by selling German stocks when the proportion of German firms among brokers with a "buy" rating falls below the proportion of German outfits among all brokers covering that company
Applying this strategy to European blue-chips, shows German car-maker Daimler may be ripe for profit taking, given that half of the brokers rating the stock a "buy" are German, lower than the proportion of German firms among brokers covering that company.
The shares have risen 30 percent year to date, outpacing a 19 percent rise in the STOXX 600 Europe Automobile and Parts index and a 5 percent increase for the STOXX Europe 50.
Among Spanish stocks, Inditex appears to be shunned by brokers headquartered in the Iberian peninsula, only three of whom recommend investing in the shares, out of a total of nine buyers based anywhere.
This one-in-three ratio compares with 12 Spanish and Portuguese brokers covering the shares out of 26 in all, according to StarMine data based on brokers who disclose their recommendations.
Shares in Inditex, the owner of global fashion brand Zara, have fallen 1.7 percent this year, retreating from an all-time high hit in December partly due to a shrinking economy in Spain, which accounts for roughly a fifth of the company's sales.
(Editing by Stephen Nisbet)