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Why now is an ‘ideal time’ to buy European stocks — and especially banks

  • Europe's Stoxx 600 is 7 percent up since the start of the year, but analysts believe that there's further room to go.
  • Improved fundamentals and attractive valuations for stocks are seen as key reasons why investors should continue to focus on the continent
Jason Alden | Bloomberg | Getty Images

Stocks in Europe still have room to push higher in the next few years despite a series of political pressures weighing on sentiment in the region, equity analysts told CNBC.

"Core Europe remains one of the preferred markets for us and one we believe offers attractive opportunities for investors over a multi-year time period," Jeff Donlon, managing director of global strategies at investment management firm Manning & Napier, told CNBC via email.

Improved fundamentals and attractive valuations for stocks are seen as key reasons why investors should continue to focus on the continent. This despite an uncertain outcome from the German elections, where Chancellor Angela Merkel saw her government weakened slightly, and despite constant fears over the outcome of Brexit.

"We sense that Brexit gas actually caused the EU to unify rather than pull apart," Donlon said. "We believe the narrative following the German election and what it means for further EU unity and integration has gotten a bit too bearish," he added.

Europe's Stoxx 600 is already up 7 percent since the start of the year. Nonetheless, portfolio managers at Acadian Asset Management believe that European equities have further room to run.

"European stocks currently provide far more generous dividends than U.S. companies," they said in an emailed note. Dividends are sums of money paid regularly by a company to its shareholders out of its profits. Acadian Asset Management predicts that earnings growth for the current fiscal year will be "considerably higher" for European companies, compared to last year, than for those in the U.S.

What sectors?

Banking is surprisingly one of the most attractive sectors, according to analysts, despite some legacy issues such as high levels of bad loans in southern European nations. This is because their revenues and profits come largely from domestic Europe, where domestic demand is improving, as well as because these lenders have come a long way since the sovereign debt crises to address stability issues.

"We are also finding opportunities in consumer discretionary, building material and construction, industrials, health care services and IT," Donlon said, given that some companies within these sectors are also largely exposed to domestic Europe.

Acadian Asset Management said: "Despite having lagged U.S. equities for several years … European equities look poised to outperform. For investors considering new or increased allocation to European equities, this appears to be an ideal time."

And this is not because of outside factors, like increased political risks in the U.S., but due to an improved environment in Europe, the company said.