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Global Stocks Report: Let's Go Europe

Investors looking to capitalize on global trends should focus on European stocks, which are expected to outgain their counterparts in the United States -- even with the Dow Industrials setting almost daily records and the S&P 500 back at the 1500 level -- as well as elsewhere through the end of the year.

"The Euro area grew at its fastest pace in six years in 2006, and the economy's forward momentum looks solid," Simon Johnson, director of research at the International Monetary Fund, said earlier this month. "Growth has been boosted by employment gains and rising productivity, a healthy combination that Europe has not seen in some time."

Foreign stocks have outperformed U.S. stocks in the past four years, but gains have not been limited to the breakout markets of China and India.

Benchmark indices in France, Germany and the U.K. are all trading just shy of seven-year highs. Experts say the region should see further gains in 2007, making it a good bet, and perhaps more importantly, a safer one, as emerging markets stocks have cooled somewhat following big overall returns of 220% in the last five years.

"I don't know if I want to be wildly overweight in emerging at this point," said Jay Bryson, global economist at Wachovia Securities. "It seems like the market is starting to pull back from some risk, it's not as gung-ho as it was a few years ago."

In addition, unprecedented levels of liquidity have sparked a flurry of mergers and acquisitions activity. Finally, Europe's central bank has contributed to the favorable credit environment with interest rates below that the U.S. Federal Reserve's.

"We think corporate Europe is getting its act together," said Alec Young, international equity strategist at S&P Equity Research. "You're seeing that in M&A, especially with investments in emerging markets."

The expansion of the European Union and its single currency system has lifted personal incomes amid broad restructuring efforts in Germany, the world's fifth-largest economy in terms of gross domestic product, as well as other member economies.

Since touching a bottom in March 2003, Germany's benchmark DAX index has gained approximately 190% while France's CAC has gained 110%, compared with gains of 77% for the S&P 500 during the same period and 66% for the Dow.

That trend remains in place in 2007, as the accelerating decline in the dollar has added 3% to international returns of about 9% year-to date versus about 6% for U.S. stocks.

"It's a good year to be outside the U.S.," said Ernie Ankrim, chief investment strategist at Russell Investment Group, who likes foreign stocks over U.S. equities, and prefers companies in established countries.

"In developed markets, I think Europe looks good, and the rest of North America, Canada has been strong," he said. "Japanese equities aren't the place we would be outside the U.S. We like Europe more than Japan, which has got some economic challenges ahead of it."

U.S. investors can invest in Europe through a plethora of exchange-traded funds such as IEV, which tracks the S&P Europe 350 index. ETFs are becoming increasingly sophisticated and allow retail investors to easily cash in on global economic trends.

State Street Global Advisors , which runs the popular "spider" line of exchange-traded funds, recently launched the SPDR S&P International Small Cap ETF and the SPDR S&P World ex-US ETF .

Both international funds began trading on the American Stock Exchange on April 26, bringing State Street's total number of foreign funds to 16. Meanwhile, Barclays offers about 40 single-country ETFs with several more expected to launch this year.

Investors should also not overlook U.S. companies leveraged to overseas markets. Last week, shares of Coca-Cola hit a two-year high after the world's largest beverage maker said steadily rising sales in Latin America and other key international markets such as China and Russia helped boost its bottom line by 14%.

An economic recovery in Europe and Japan is finally starting to show its effects in the United States, said Abby Joseph Cohen, chief U.S. portfolio strategist at Goldman Sachs.

"One reason (U.S.) profit growth is so good is that many U.S. companies do business not just at home but also overseas," Cohen told CNBC. "And they're benefiting from a solid global economic picture."

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