Citi drops Vodafone from top stock picks

Adam Jeffery | CNBC

Citigroup has dropped Vodafone from its list of top European stocks, due to uncertainty about the fallout from its multi-billion dollar deal with Verizon.

The bank's list of its top European stock picks, penned by equity analysts Elise Badoy and Jonathan Stubbs, came just days after the U.K. telecoms giant confirmed the $130 billion sale of its stake in Verizon Wireless.

"We see a risk that Vodafone shares could be held back near-term, as some investors are put off by having to manage their exit from the Verizon exposure," the analysts said.

However,they retained a buy rating on the stock, adding: "We see prospects for an improving business outlook for Vodafone in Europe."

(Read more: Why $130 billionVerizon-Vodafone deal makes sense)

Citigroup also removed Syngenta, BSkyB and Sanofi from its list of top picks, adding ING, Linde, Renault and Shire Pharmaceuticals instead.

The bank was bullish on Europe,saying the economic climate, while tepid, had improved considerably over the past 6-to-12 months, and that strong business activity data have confirmed a pick-up in activity across the continent.

(Read More: Don't be afraid, recovery takes time: Soc Gen CEO)

Given this environment, the analysts said that European equities were attractive relative to bonds, arguing that they were"no longer so cheap, but also not expensive".

Notably, Citigroup said this month's German elections were low down on its"worry list", with emerging market difficulties and U.S. tapering more of a concern. Emerging markets, in particular, remained a real worry: "While macro risks have been reducing and macro data improving in Europe, the opposite has been happening in emerging markets."

Citigroup said that it lowered its growth outlook for emerging markets (EM) progressively over the last 18 months. "Various EM countries remain vulnerable to the combined effects of China's slowdown, modest DM (developed market) growth and the probably scaling back of U.S. QE (quantitative easing)."

As such, Citigroup said it favored European stocks with less exposure to these countries.

(Read more: Vodafone's Verizon deal has left some shareholders with a big headache)