European stocks have made solid gains, but even so, the gusher of money into Europe should continue as investors who shunned it since the financial crisis return.
Despite continued concerns around Brexit and the upcoming U.K. elections, money continues to flow into the region. According to Lipper Research, European focused, U.S.-based domiciled funds alone saw net inflows of $4.2 billion in May, bringing total net flows year-to-date to $9.2 billion.
According to research from Bank of America Merrill Lynch, so far this year investors moved $13.7 billion to European funds.
Analysts say investors have been underinvested in Europe for a variety of reasons, from the Greek debt crisis to the French election. They have been catching up, but it's going to take time. "We think the economic fundamental drivers are very solid. We think there's an earnings upturn. ... It's early on," said Paul Christopher, chief international strategist at Wells Fargo Investment Institute. "We think it's still a good time for clients who have been scared of Europe, underweight Europe for years, to get back to even weight."
Political risks in Europe still exist, but analysts point to recent figures that suggest the euro zone economy is growing at its fastest rate in years, much faster than the U.S. economy. In many countries, wages are rising, unemployment is falling, and credit conditions are easing as well, the European Commission reported.
The German DAX is up 12 percent year-to-date, at a record high Friday. The French CAC is up 10 percent, and the U.K. FTSE, up 5.5 percent for the year, was also at a record high.
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Christopher and other analysts say European stocks do appear to be getting pricey, but they are still going to benefit from earnings improvements, which are at an early stage.
"From a short-term perspective, what we're advising clients to do is to use dollar-cost averaging when buying European stocks. We think the earnings recovery will be long-lived enough to sustain averaging over a couple of quarters," he said.