LONDON (Reuters) - Low valuations, weak sterling and continued interest from Chinese companies in overseas dealmaking is likely to see merger activity in Europe pick up again, according to Credit Suisse.

While the level of mergers and acquisitions (M&A) in Europe is running below that of last year, partly as political risks, including Brexit, have kept firms cautious about spending on risky deals, the backdrop remains benign, Credit Suisse said.

Conditions favoring M&A in Europe -- like the cheap cost of funds and relatively low debt outside of financials and resources companies -- have been in place for a while, and now growing Chinese interest is a new factor.

"The disruptive influence of China is now showing itself in another manner through rapidly growing outbound M&A," Credit Suisse analysts said in a note to clients.

Chinese firms have an appetite for high-end industrial technology, branded goods and lifestyle assets, the broker said, adding that a relatively strong yuan, the low cost of capital at home and a slowing domestic economy were spurring them to look abroad.

Outbound M&A from China so far this year of roughly $144 billion has hit a new record, according to Credit Suisse, already surpassing last year's total.

ChemChina's $46.7 billion bid to acquire Swiss chemicals firm Syngenta <SYNN.S> remains the largest M&A transaction in Europe this year while Chinese firms' interest in German industrials is growing.

The sharp drop in sterling following last month's Brexit vote made British assets much cheaper for foreign investors and could spur interest in retailers, particularly in the luxury goods sector, according to Credit Suisse.

The broker highlights seven stocks in Europe as potential M&A candidates that also rank high on its valuation models: Centrica <CNA.L>, Euronext <ENX.PA>, Exova <EXO.L>, ITV <ITV.L>, Shawbrook <SHAW.L>, Victrex <VCTX.L> and Zodiac Aerospace <ZODC.PA>.

(Reporting by Vikram Subhedar; Editing by Adrian Croft)