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European Stocks Are Glowing

Stocks in this article: EEAVLKAYLVMUYAZSEYINGDLAKYAOMFFAIAGY

NEW YORK ( TheStreet) -- Despite the gloomy economic headlines coming from across the Atlantic, European stocks have been positively glowing, said Rainer Vermehren, portfolio manager for the European Equity Fund (EEA). The closed-end fund, which was launched in July 1986, has returned an impressive 16.5% so far this year.

Welcome to TheStreet's Fund Manager Five Spot, where top fund managers give their best stock picks and views on the market in a five-question format.

Many people think German and European stocks have been poor performers this year because of Europe's economic problems. What have they been missing?

Vermehren: Investors that have avoided German and some European stocks have certainly missed out. The Dow, S&P 500 and Nasdaq indices are up around 7%, 12% and 14% respectively this year in U.S. dollar terms. In comparison, the German DAX, made up of 30 German stocks, is up approximately 23% so far this year in dollar terms. Even the Euro-Stoxx Index, which is made up of 50 blue-chip eurozone stocks, is up close to 9% year to date in dollar terms. That's not so bad considering the European sovereign debt crisis that has kept the markets here at bay for most of the year. Finally, the Swedish and Swiss markets are up around 10% and 12% this year, keeping pace with U.S. equity development.

What are your top European stock picks?

Vermehren: Two export plays we like are Volkswagen (VLKAY) and LVMH (LVMUY) because they have attractive export shares outside the European Union. Both are also plays on the higher growth in emerging markets.

We also like insurers Allianz> (AZSEY) and ING (ING). We see them as value plays that are rebounding after having been in an out-of-favor sector. The stocks are seeing relief triggered by the announced backdrop of the European Central Bank which has proposed "unlimited" buying of stressed European sovereign debt.

Finally, we are bullish on Lufthansa (DLAKY) and Alstom (AOMFF). Both stocks are smart plays on a cyclical rebound. Lufthansa has been successful in cutting costs, and as a result, it reported 3Q earnings that were better than expected. Alstom's fundamentals are back on track with the order momentum for gas turbines having been accelerating, while the bad news in rail has been discounted.

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