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A 'contrarian' way to profit in 2017? Buy 'undervalued' Europe, BlackRock says

A major Wall Street firm is encouraging investors to start looking for opportunities in Europe, even as uncertainty surrounding Brexit and upcoming elections in the region linger.

BlackRock, which formally upgraded its rating on European assets to neutral from underweight, believes this could be a 'contrarian' way for investors to profit this year.

"We think a lot of the risk is starting to be priced in. So, you're actually being paid a nice premium," said Terry Simpson, the firm's multi-asset investment strategist this week on CNBC's "Futures Now."

According to Simpson, BlackRock is "actually starting to inch back in... This is still a very undervalued market relative to the United States."

Simpson is telling clients to seriously consider investing in overseas developed markets. Instead of just relying on recent U.S. gains which have been chiefly driven by multiple expansion, he says investors should rotate back into Europe and put money to work in Japan.

"We look at the performance of Europe and Japan absolute relative to the U.S. over the last month to three months. That's actually been a really good trade," he said.

In just the early days of 2017, the FTSE 100 is up nearly a full percentage point, building on last year's double digit percentage returns.

Businessman facing opposite direction
Forest Woodward | Getty Images

Even though BlackRock has become more positive on Europe, vulture investors have been rolling the dice on the region for a while.

Billionaire hedge fund manager Mark Lasry of Avenue Capital Group told CNBC last month that he's been looking for distressed opportunities there. But in BlackRock's case, the call pertains to mainstream investors.

It's even more positive on Japan, the world's third largest economy. The Nikkei surged to a 13-month high as the new year began.

"We've just recently upgraded our stance on Japan to an overweight," said Simpson. "You also still have a very, very supportive Bank of Japan where here in the United States you have a Fed which that is normalizing. The BOJ seems to be very committed to being very accommodative and pushing this recovery forward."

Despite falling into a more than two decades long economic slump triggered by an asset bubble bursting in the early 1990s, Japan's stock market appears to be finding a solid footing. BlackRock points to a weaker yen, improving global growth and more shareholder-friendly corporate behavior there.

To further play both Japan and Europe, Simpson says investors should consider getting into the currency markets.

"There's upside momentum here for the dollar and there is still downside pressure for the euro as well as the yen," he said.

"What's really important is when you start building these positions in Japan and Europe," Simpson explained. "You want to be taking it on a currency hedge basis to protect you from some of that volatility and that should actually be the much more optimal positioning for investing in the international developed markets."

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