BlackRock believes investors are too skeptical about European stocks. This is why they shouldn't be

Financial traders at the Frankfurt Stock Exchange
Hannelore Foerster | Bloomberg | Getty Images

European equities are set to become the big winners as policy makers try to revive inflation, according to a report published by a team of BlackRock strategists.

The report argued investors are too pessimistic about the bloc's outlook in spite of growing evidence that equities are set to prosper. A weakening euro, improving economic growth globally and U.S. led reflation were key reasons for BlackRock strategists to adapt their outlook for European equities from neutral to overweight.

"We believe European equities should benefit in such a reflation scenario, absent (of) any other shocks," BlackRock strategists said in a note.

"European earnings have historically been more sensitive to global economy pick-ups than U.S. counterparts, given European firms' lower margins and large revenue exposure to global and emerging markets," they added.

Political uncertainty 'overstated'

Investors appear particularly concerned with the perceived political risk brought about by general elections scheduled in France, Germany, the Netherlands and potentially Italy in 2017.

France has produced one of the most unpredictable election campaigns in decades with anti-immigration and populist party leader of the National Front, Marine Le Pen, currently leading the polls with just two months to go until the first round of votes are cast.

However, BlackRock strategists believe investors are overly cautious regarding political uncertainty throughout European Union.

"We believe the political risk priced into European markets around upcoming French and German elections is overstated. A likely Italian election may prove to be a populist flashpoint, but the major risk to our view is that a global slump cuts short the reflation trend (which seems) an unlikely scenario in the near term," they concluded.