Undervalued euro shares a hurdle for US stocks

The Euro zone outperformed US stocks in recent weeks, ending 0.2 per cent higher this week, while Wall Street underwent a two per cent loss

After Wall Street's biggest weekly decline since June and the worst week this year for the Dow average, investors will be searching for a rebound. But the best gains may not be at home as investors take notice of an improved outlook in Europe.

Fund managers have started to shift to euro-zone equities after a series of economic indicators showed the region finally emerging from recession.

The region outperformed US stocks in recent weeks, ending 0.2 per cent higher this week, while Wall Street underwent a two per cent loss. For the month so far, the total return of euro-zone equities is around 1.9 per cent compared to a 1.8 per cent loss on the S&P 500 index.

That's a very different picture from the first half of the year when the S&P 500 posted 12.6 per cent growth, while the pan-European FTSEurofirst 300 index had a mere 1.6 per cent growth.

The difference might also point to which parts of the US market are likely to perform well after a long run by companies that do the lion's share of their selling within America's borders.

"The increase in volatility and uncertainty we've seen throughout the Euro zone is finally coming to an end," said Diane Garnick, chief executive of Clear Alternatives, an asset management firm in New York.

"We are much more comfortable looking at US international companies that have exposure in Europe, given the stability we see there now," Garnick said, adding that she favours Johnson & Johnson over other stocks with big exposure to the domestic market like Walgreen Corp.

Flows into European equities from US-based funds hit a two-month high in the week ended August 14, data from Thomson Reuters Lipper service showed, signaling steady investor appetite for the single-currency bloc's shares.

A Lipper basket of 92 funds invested in European shares, which include exchange-traded funds' (ETFs) holdings, took in a net $755 million, the biggest inflow since a record $1.17 billion in mid-June and a rise from the prior week's $580 million inflows.

A Bank of America Merrill Lynch survey of fund managers for August showed a net 20 per cent of respondents would overweight the European market over a 12-month period, the highest reading in over six years. That made investors' top choice over this horizon Europe, ahead of Japan.