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Pricey U.S. Stocks Accelerate Move to Europe, Japan

European Appeal

Europe has become attractive as the eurozone emerged from an 18-month recession in the second quarter with 0.3% growth. At long last, the general consensus is that the region is no longer in crisis, and true to form, investors have already jumped on board: the final week of September saw a record $5 billion in funds flow from US investors to European stockmarkets, according to Bank of America Merrill Lynch and EPFR Global.

Bill Mann, who helps oversee $550 million at Motley Fool Asset Management, backs Koesterich's stock specific approach to Europe - pointing to opportunity in stocks like Nestle, Adidas and other large consumer and luxury brands.

Martin Jansen, head of international equities at ING U.S. Investment Management, likes select European financials, given that banks and lenders should benefit as the region's economies recover from the worst of the sovereign-debt crisis. But Jansen warns that cheap energy and commodity companies may present value traps appearing cheap while failing to offer share price upside. Jansen helps oversee $160 billion in funds.

More broadly, some investors point to greater potential for profit-margin growth in Europe or Japan compared to the U.S., where profit margins are viewed as close to peaking. Matthew Beesley of Henderson Global Investors, who helps oversee $103 billion in funds, emphasizes that European margins are still 2% below their peak.

"I'd make a bet lots of companies will be surprised at their operational leverage immediate profit boost from revenue growth after cost cutting," Beesley, Henderson Global's London-based head of global equities, said in a phone interview.

Stimulus Boost for Land of the Rising Sun

Japan is another region where fund managers see value. "For the next six to twelve months, Bank of Japan stimulus will be a bigger tailwind for their equities than Fed stimulus," Koesterich says, referring to Japan's still-nascent economic recovery compared to the U.S., where stimulus is expected to be reduced sometime next year.

Longer term, Jansen says the world's third-largest economy is just beginning to catch-up to other developed markets after decades of deflation. In addition, he notes that Japanese companies are making more active use of their balance sheets - investing and spending for growth rather than hoarding cash - suggesting further upside for Japan's domestic environment despite the Nikkei's 57% gain over the past 12 months.

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