With US equity markets deemed ripe for a correction, an increasing number of global fund managers are eyeing European stocks trading on deep valuation discounts, as currency weakness boosts both their competitiveness and attractiveness as takeover targets.
The optimism towards European equities comes despite plenty of political noise - rising populism ahead of several key elections in the region and the imminent triggering of Brexit in Britain.
Last week's Bank of America Merrill Lynch global research fund manager survey - which polls fund managers with close to $US600 billion ($786 billion) in assets under management - found eurozone equities were the second-most popular destination for investors' money, second only to Japan.
Societe Generale emphasised its analysts' general bullishness on Europe in a report titled All Good Things Point to Europe.
Eurozone equities, it noted, are "trading at a 47 per cent discount to their US counterparts".
"The better economic and inflation outlook, mixed with an expected drop in policy uncertainty after the French election, should make the region strongly appealing," it said.
Eurozone equities, after a long period of weakness, have risen strongly in recent months, boosted by positive economic data, including last week's eurozone PMI, which showed manufacturing activity growing at the fastest pace in six years.
Germany's DAX is up 21.3 per cent in the past year. France's CAC40 is 14.9 per cent higher. The Euroxstoxx50 has added 14.4 per cent in 12 months.
The FTSE 100, meanwhile, has risen 21.9 per cent from its post-Brexit slump in June last year, and investors do not appear overly worried about British Prime Minister Theresa May's expected triggering of Article 50, starting the country's removal from the EU on Wednesday.
Barry Dargan, CEO and portfolio manager of London-based global equities fund manager Intermede Investment Partners, said currency movements were the main factor behind the FTSE's rise.
"We saw a very significant depreciation in the pound relative to most global currencies once we realised Brexit would happen in June," he said. The British pound, unlike British equities, has not recovered from its Brexit slump, and is still 15.2 per cent below where it traded before the referendum.
"That's an enormous boost to the economy - it's reflationary and very positive for exporters. It's given the UK economy a shot in the arm, and made it cheap for foreigners to buy UK assets."
Much of the FTSE 100 is comprised of multinational companies that report in sterling, but whose earnings are generally in US dollars.
Commonsense solution
The key risk for British equities, particularly export stocks, is the country's imminent exit from the EU, but Mr Dargan is sceptical that trade with Europe will significantly decrease once Brexit is triggered, especially given the free trade commitment of the German government and the fact the EU exports more to the UK than it imports.
"I would have thought putting up trade barriers would be very negative and damaging for the EU," he said. "Common sense really ought to prevail."
Currency effects were also a key factor in Societe Generale's analysis of European equities . It notes the euro has markedly fallen in the past 10 years, a period in which eurozone equities also underperformed their US counterparts.
"Today, all sectors in the eurozone are trading at a significant discount to their US peers: from 26 per cent for the healthcare sector to 60 per cent for consumer discretionary.
"On top of the valuation gap, the currency has significantly weakened: the euro has fallen by 33 per cent versus the US dollar over the last decade.
"As a consequence, eurozone companies appear particularly attractive to non-euro-listed companies, particularly US companies.
"In 2016 the main acquirers of European companies were US companies. The better economic and inflation outlook mixed with the expected drop in policy uncertainty after the French elections would make eurozone companies strongly appealing. This is our central scenario."
Societe Generale is particularly bullish on Italian stocks, noting the country is now recovering from "anaemic" GDP growth.
Mr Dargan says investors should remember, however, the difference between companies in the US and European sharemarkets.
"There's a difference in the sort of companies you find in Europe. Europe doesn't have your Google, Facebook, Amazon and Netflix. Those more innovative, high-growth, high-return, network-style companies have fantastic profitability and grow very well. And they have higher valuations, and large market caps in the United States."
Such stocks, he notes, push up the valuations on US shares - but for good reason.
