Despite depressed valuations, many European companies are leaders in their sectors. For example, auto companies BMW and Volkswagen, retailers Inditex and H&M, pharma companies Roche and Novo Nordisk and tech companies SAP and ASML all are leading global companies with solid fundamentals that are undervalued.
(Read more: How Europe outperforms in 2014: Goldman)
In addition to benefiting from well-positioned exposure to global growth, the high operating leverage inherent at most European companies will allow them to benefit from even a slight improvement in the domestic European economy.
Adding to the improving investment climate is the behavior of the currency. The euro has remained much more stable in recent years than most investors expected, since currency markets recognize what stock investors have not: that Europe as a whole is in much better fiscal health than most people realize.
(Read more: Europe tries to cut deal to close failing banks)
One often overlooked, but a key point, is that the sovereign debt issue that created the extreme headlines in recent years is in the periphery of Europe. Aside from the periphery, Europe does not have a sovereign debt problem. The core European economies have relatively favorable ratios of government debt to GDP and deficits as a percentage of GDP compared to other regions. In fact, Europe has lower debt and smaller deficits than both the U.S. and Japan. Overall government debt as well as annual deficits are on a more sustainable trajectory in Europe than most other regions in the world.
Our conclusion is that the critical issues in Europe are more political in nature than economic. The real challenge for mainstream Europe is not deficit reduction but finding the political will to create a more adept political structure that is properly equipped to deal with the problems presented by the peripheral countries.
That process is taking shape. European Central Bank President Mario Draghi's pronouncement in the summer of 2012 that, "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough," marked an important turning point.
(Read more: Euro zone gets manufacturing boost, France drags)
The ECB is poised to take over as the region's bank supervisor in 2014. In addition, there is significant positive impact from initiatives started by European politicians and representatives from the ECB and International Monetary Fund, such as significant easing of monetary conditions, further movement toward political and banking union and debt relief for the periphery. These are all factors adding to a much more favorable investment climate in Europe.
This year, for example, there are concrete signs that previous European risk concerns have been stabilized. The market impact from inconclusive Italian elections early in 2013 was painful but short-lived. In contrast, similar events in Greece during 2011 and 2012 took Europe on a downward spiral for months at a time. Likewise, the Cyprus bank deposit confiscation in March was also painful but is now largely forgotten. Market reaction to these events suggests that while risks remain, apocalyptic extrapolation of these tail risks is gone. We believe that opportunities offered by European equities have never been better, particularly for fundamentally-focused stock pickers.
So should you be investing in Europe now? All signs point to "yes." The de-rating of Europe in recent years has created an unprecedented disconnect from fundamental factors. With macro tail risks reduced, there is no longer a case to be bearish on Europe. Investors that return to Europe at this phase of the recovery are likely to be well rewarded.
Gene Salamon is the managing partner and founder of Three Bridges Capital, an independent investment management firm focused on European equities based in New York City. The firm's flagship European Long/Short Fund was launched in September 2006. Salamon has focused on European equities for nearly two decades. Prior to forming Three Bridges, he was a partner at Indus Capital where he launched and managed the Indus Europe Fund and was a partner and portfolio manager at Omega Advisors where he managed a European equity long/short strategy.
