The upside potential is greater for European stocks than for those in the United States, hedge fund manager David Gerstenhaber told CNBC on Wednesday, a day after the Dow Jones industrial average and the S&P 500 lost their 2015 gains in a major Wall Street selloff.
"I would be more bullish on European stocks," given the European Central Bank's massive bond-buying program and the economy there showing some improvement, the Argonaut Capital Management president said in a "Squawk Box" interview. "Germany looks pretty good in Europe. The economy is doing pretty well over there." European stocks have a "lower starting valuation point" than U.S. stocks, he added.
There's little reason for "fairly generous" stock multiples in the U.S. to expand further against a backdrop of expected rising interest rates, said Gerstenhaber, one of Julian Robertson's first so-called "Tiger Cubs." Gerstenhaber launched the legendary investor's macro investment group, which was responsible for some of the fund's biggest calls during the 1990s, such as betting on the collapse of the British pound and the sharp slide in crude prices following the onset of the Persian Gulf War.
"It's difficult to get excited about an environment where you don't get multiple expansion and you haven't got any substantive earnings growth," Gerstenhaber said. "The underlying economy is doing OK. It's not doing great. We've got reasonable forward momentum. It's enough to get the Fed out of the starting gate."
Looking ahead to the next Federal Reserve policy meeting, he said, "The Fed is, as everyone knows, very likely to change its language next week. And it's trying to prepare the markets for liftoff." Economists expect central bankers to drop their promise to be "patient" on rates. The Fed started cutting rates to their current near zero percent levels in 2007 and 2008. The last Fed funds rate hike was in 2006.
Addressing questions over whether the euro slide is headed toward parity with the dollar, "these things tend to get some real momentum when they get going," Gerstenhaber said. "The dollar has lots of reasons to go up right now. And the euro has lots of reasons to go down." The last time the euro and dollar were at parity was in late 2002. But even with the recent spike, he argued, "the dollar hasn't gotten itself to an expensive level at this juncture. It's still reasonably inexpensive if you compare where it's been in the past."
As for the collapse in oil, Gerstenhaber does not expect prices to substantively rise in the next year. But he does not see the trend in crude as too detrimental to the stock market. "This reminds of 1985 and 1986 when we had a similar drop in oil prices and the market did OK. It was not a bad times for financial assets."
Besides Europe, he said he likes the prospects for stocks in Japan. "Japan has had a good move. Japan is a cheap market. They've got record earnings over there right now, which people don't realize. The structural changes are starting to filter through in that economy."