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Look to Europe for Mutual Fund Profits

Stock markets around the world have been on a tear over the past few years. But now that the bull runs in the U.S. and in many emerging-market economies are beginning to look tired, investors may want to turn to the Old World.

Yes, Europe has had nice run as well. But the economy isn't as far along in the economic cycle as the U.S., and many European companies are still undervalued, relative to their U.S. counterparts. So the rally should still have some legs, say some fund managers.

"The European economy is accelerating as the U.S. economy slows," says Clas Olsson, co-lead manager of the $1.62 billion (AEDEX)AIM European Growth Fund (AEDEX).

Olsson points out that the price-to-earnings ratio price-to-earnings-ratio-p-e of the Stoxx 600, which represents 600 large-, mid- and small-cap companies across 18 European countires, is just 14, on the basis of earnings estimates for 2007. That compares with a P/E of 16 for the S&P 500.

Do you continue to see opportunity in the European stock market?
Answer Here

The fund manager says attractive valuations aren't the only things European companies have going for them, however. Many are involved in U.S.-style restructurings that are weeding out inefficiencies and making them more efficient.

What's more, the corporate tax rate is lower in Europe, having fallen dramatically over the past 10 years to 36% from 50%, according to Olssen. And the European consumer, who has a lot of cash but no confidence, has more buying power than the U.S. consumer, who has no cash but lots of confidence.

AIM European Growth has benefited from these trends, posting annualized returns of 19% over its 10-year existence.

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