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Investors scoop up European equities despite the rising euro

  • The euro has strengthened against the dollar on geopolitical concerns posing risks to businesses in Europe as their products become more expensive abroad
  • The performance of European companies, the reduced political risk, and the economic momentum have convinced money managers
Trader sit at his desk under the day's performance board that shows a dive in the value of the DAX index of companies at the Frankfurt Stock exchange
Thomas Lohnes | Getty Images
Trader sit at his desk under the day's performance board that shows a dive in the value of the DAX index of companies at the Frankfurt Stock exchange

The landscape in Europe is changing but investing in European companies isn't far-fetched, analysts told CNBC.

The euro has strengthened against the dollar, rising to more than 14 percent since the start of the year, on geopolitical concerns posing risks to businesses in Europe as their products become more expensive abroad. Though some analysts fear a market correction if the common currency keeps going up, many market players believe European stocks still have a lot to offer.

"We like European equities," Nandini Ramakrishnan, global market strategist at JP Morgan Asset Management told CNBC on Tuesday morning despite recognizing that there are risks in Europe, including a higher euro and elections in Italy next year.

"For the first time in several years, European equity earnings are increasing throughout the course of this year rather than decreasing and the biggest technical argument for that is the fact that 60 billion euros ($72.29 billion) exited European equities in the past two years, 20 billion euros ($24.09 billion) of that are back in, there's still 40 billion euros ($48.18 billion) waiting on the sidelines," she noted.

European companies reported a 25 percent profit growth in the first quarter of 2017. Furthermore, the Stoxx 600 has been on the rise since the start of the year by about 1.7 percent (Tuesday was a particularly difficult day for stocks after North Korea sent a missile over Japan) as investors have switched their positions from the U.S. into a more politically-certain Europe. As the election calendar in Europe has cleared and political risks dissipated, money managers have flocked to European stocks at a time when the policy direction in the U.S. became more unclear.

At the same time, the European economy has been growing and showing signs of recovery. Official data from the European statistics office showed earlier this month that the euro zone grew at a pace of 0.6 percent in the second quarter of the year, after posting a 0.5 percent growth in the first quarter.

The performance of European companies, the reduced political risk, and the economic momentum have convinced money managers. The CBOE Volatility Index, commonly referred to as the VIX, hit its lowest level since 1993 in May after President Emmanuel Macron was elected in France.

Analysts at UBS have revised their positions on the European market, despite the strengthening euro. "We are increasing our allocation to the European domestic market," UBS said in a note on Tuesday.

"Stocks exposed to the European domestic economy have shown consistently better earnings per share (EPS) momentum than the market since late 2016. In recent months, this increased further and reached the highest level in over a decade. This is in contrast to the long period of downgrade post the financial crisis and suggests we could continue to see upgrades going forward," the bank said.

UBS has upgraded its growth forecasts for the euro area to 2 percent in 2017 and 1.6 percent in 2018.

However, some analysts believe that this is a moment to wait. Yves Maillot, head of European equities investment division at Natixis Asset Management told CNBC on Monday that the good performances of European companies have been impacted by the stronger euro, meaning that they could be performing better if the currency hadn't gained as much strength.

"We have to wait…but I do think that if the upward trend of the euro continues we can fear a new market correction," he said.

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