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Money managers have a new love: Europe

dberman@globeandmail.com

David Berman writes for Inside the Market (tgam.ca/inside-the-market), which offers up-to-the-minute analysis of stock trends and market-moving news throughout the trading day.

If you think Europe offers the best opportunity for finding beaten-up stocks in the midst of a rebound, keep in mind that you are not alone: Europe has become a popular the destination for professional money managers, raising the question of how much upside is left.

That's one of the implications drawn from the latest Bank of America fund manager survey, which reflects the strategies of 236 participants and $689-billion (U.S.) of financial assets - making it a good snapshot of what the smart money is up to.

Right now, they are buying European stocks, and in a big way. According to the survey, their enthusiasm has reached its highest level since before the financial crisis, following a sharp spike in interest over the past month alone.

This isn't necessarily a problem for European stocks, but it does suggest that the region has swung from a global basket case, as recently as last year, to one where lofty expectations are now built in.

The survey's numbers definitely point to bullish enthusiasm. A net 36 per cent of asset allocators are now "overweight" the region, making it the global hotspot.

That marks the highest level since 2007 - when European stocks hit a record high - and more than double the net allocation seen in the previous month's survey, in August. In July, the net overweight position in Europe was a mere 2 per cent.

This surging interest appears set to rise even higher: A net 27 per cent of investors said that they would likely overweight the region over the next 12 months.

What do they see? Certainly a strong stock market: The MSCI Europe Index has risen 33 per cent over the past 15 months, touching a five-year high as fears of a euro-zone implosion have eased with a receding recession and fading sovereign-debt crisis.

They can also see the potential for more gains ahead. While the S&P 500 is close to a record high and well above levels seen before the financial crisis, European stocks would have to rally another 30 per cent to reach their 2007 high point.

"Belief in Europe's economy is robust and though euro zone equities have come back strongly, value remains the best on offer in developed world markets," said John Bilton, European investment strategist at Bank of America, in a release that accompanied the survey.

According to strategists at Pavilion Global Markets, this value can be seen in the relatively unenthusiastic response from analysts. They argued that European economic data have improved, but analysts have not been keeping pace with their estimated corporate earnings.

This reflects what they see as a lingering skepticism related to Europe's long-term structural issues, which could be a good thing.

"We view this skepticism as preserving some upside to the rally in European equities, because markets risk being surprised when the improved economic data [begin]translating to corporate earnings and outlooks," the Pavilion strategists said in a note.

In other words, while Europe is by no means the contrarian play it was in mid-2012, it continues to offer potential for investors.

Still, if contrarian plays are more your thing and the mass-migration of fund managers comes as a sign that Europe's best returns have been generated already, the Bank of America survey offers this idea: emerging markets.

As in, they are loathed. According to the survey, a net 18 per cent of global fund managers are "underweight" emerging market stocks, marking the lowest exposure since 2001 - a bearish view that no doubt reflects the 17 per cent decline in these stocks over the past two-and-a-half years.

Of course, buying emerging market stocks now puts you in a very lonely place. But as you can see in Europe, sustained rallies have a habit of attracting attention.

© 2007 The Globe and Mail. All rights reserved.

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