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Should you dive into European markets?

Leslie Shaffer
Tuesday, 20 Aug 2013 | 1:12 AM ET
Rob Lang | Workbook Stock | Getty Images

The emerging markets' late summer rout may mean it's time to stick a toe into Europe's pool, but a cannonball off the high dive may not be on the cards.

"If investors are deserting the high risk, high return end of the risk-return curve, they're looking for currencies and for economies that are relatively stable," Steven Englander, head of Group of 10 currency strategy at Citigroup, told CNBC.

"When funds are deserting emerging markets, they don't just go into the U.S.," he added. "As strange as it sounds given the history of European peripheral debt, Europe benefits from lower commodity prices. They're a low beta economy. They have low beta asset markets."

(Read more: Forget US, Japan; It's time for European stocks to shine)

In the week ending August 14, investors bought $2.8 billion worth of European equities, a 15-month high and the seventh straight weekly net inflow, compared with an outflow of $1.8 billion from U.S. stocks and an outflow of $570 million from emerging markets, according to a note from Jefferies. The note said foreign investors pulled $1.7 billion out of Asian equity funds over the same period.

Favor European over US shares: pro
Arnaud Gandon, CIO at Heptagon Capital, favors equities over government bonds, and advises investors to reduce exposure to U.S. equities.

Others also see some value emerging in Europe, despite the checkered history from its debt crisis.

"We think Europe is likely to play a bit of catch-up with the U.S.," Steve Brice, chief investment strategist at Standard Chartered wealth management group, told CNBC.

"Once they move from recession into growth, which obviously we saw in the second quarter – and we expect that to extend – that suddenly makes the debt dynamics not look as scary," Brice said. He expects 1.5 percent growth from Europe's economy next year as well as a possible pick up in earnings per share from the continent's corporate sector.

(Read more: Why it's still 'too early' to dive into European stocks)

To be sure, Europe's outlook remains cloudy. "Clearly it has huge structural challenges," Brice said. "It's not the U.S. economy."

For the second quarter, the euro zone economy climbed out of its recession, growing 0.3 percent from the previous quarter, topping analysts' expectations for 0.2 percent growth, data released last week showed. But the pace is anemic compare with 1.7 percent annualized growth in the U.S. economy in the same period.

(Read more: Watch out: euro zone recovery faces 'serious headwinds')

Englander also believes Europe's moment in the sun may be temporary. "It's not so terrible as we thought a year ago. It's probably somewhat better than we thought six months ago. But somewhat better is still far from being good," Englander said. "The weaknesses will manifest themselves over time."

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