There is substantial value left in European stocks, particularly in the banking sector, Pierre-Yves Gauthier, the founding partner of equity research firm Alphavalue, told CNBC.
Speaking on Monday, Gauthier said there was 20 percent upside in the broader European indexes that include non-euro zone countries.
"We're calling 20 percent upside – it is a view we held before last week's falls on the back of the Japanese correction. We stick to that," Gauthier told CNBC.
(Read More: EU Stocks Higher in Thin Trade; Boosted by Fiat)
European stock market indexes posted their first weekly losses in more than a month, last week, following a 3 percent fall in the Japaneses Nikkei. However, by mid-morning on Monday, the pan-European STOXX Europe 600 was trading around 0.3 percent higher.
Gauthier said confidence was returning to Europe's stock markets, and higher visibility was lowering risk premiums. "The key to European equities is that there is confidence and we tend to forget about that… They suffered a lot, this visibility has returned, so it is a huge leverage on confidence," he said.
Europe's banking stocks have a particularly strong upside, according to Gauthier. "When we are speaking of a return of confidence, clearly it is good for the banks. We can see that even through the macro-dynamic in Spain and Italy is absolutely awful, the potential for share price drops - as far as their banks are concerned - has topped, in effect."
He added that 2013 may see an uptick in bank earnings.
(Read More: European Equities Have 'Rarely Been So Appealing')
"If you look at the dynamic of earnings over the last three years, including 2013, banks have been postponing their recovery… So we hope that this year, we will at last be seeing a pickup in earnings," Gauthier said. "That is quite a turnaround, because we saw two-to-three years of declining earnings. If we end up with strong balance sheets… and earnings are picking up, obviously that makes a simple 'buy' recommendation."
However, Gauthier said it was too soon to move into cyclicals in order to capture a return to growth. He added that sectors which offer significant yields, like telecoms and utilities, were preferable, even though they were not as strong as banks.
"Telecoms - while obviously there are still plenty of questions marks about the business model, at least the dividends are very safe, because they were cut last year," he said. "And there is the very complex question of a return of interest on utilities, which do pay high dividends, but there are plenty of question marks about whether their profit, at some stage, will go up."
By CNBC's Katrina Bishop, follow her on Twitter @KatrinaBishop