Why Europe’s stock rally has a long road ahead

Hunt for income in Europe 'leads to equities'

The potential for a "great rotation" into European stocks from bonds could be on the way, given low -- or even negative -- yields in government bond markets, one equity strategist told CNBC Monday.

"We still see, particularly in Europe, the potential for a great rotation," Neil Dwane, CIO for European Equities at Allianz Global Investors, told "Squawk Box" Europe.

"We think there's over 5 trillion euros ($5.37 trillion) now of cash and bonds that yield nothing, whereas even if you just buy a European index ETF [Exchange Traded Fund] you get a yield of 3.1 percent," he said.

A 1 trillion euro stimulus program from the European Central Bank has helped drive government bond yields lower across the euro zone.

Read More If nobody likes bonds, who's buying?

Germany's 10-year Bund yield – the benchmark in Europe – yielded just 0.07 percent on Monday and could dip into negative territory this week, according to some analysts.

Traders work on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters

European stocks meanwhile have put in a strong performance this year, aided by ECB quantitative easing, a weak euro and brighter prospects for the euro zone economy.

The pan-European Euro STOXX 600 index has added 18 percent to date in 2015, and surpassed a March 2000 high earlier this month. It has outpaced a 1 percent rise in the U.S.' S&P 500 index and a 12.5 percent rally in Japan's blue-chip Nikkei.

But David Owen, chief European economist at Jefferies International, was quick to quash fears that a bubble in the European equity market was not developing.

Read MoreS&P to start its correction today, analyst warns

"At the end of the day Europe is recovering and European growth is surprising on the upside, we're waiting for earnings to come through to justify the PE [price to earnings] ratio," he told CNBC. "We don't have a bubble in the equity market; there isn't an issue in terms of overvaluation of markets in general."

Asked why there was a reluctance by retail investors to put their cash into European stocks, Dwane at Allianz Global Investors said there was a feeling that an opportunity to get into the rally had been missed but this was changing.

"The retail [investment] that wants income is coming for European equity income now," he said. "The hunt for income in Europe will drive people into equities, because it's the only place where you can get any income."

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