Investors should consider betting on Europe and emerging equity markets, rather than the U.S. stock market, in 2002, Salomon Smith Barney global equity strategist Matthew Merritt said Monday in a report on regional and sector strategy.

Merritt recommended an underweight position in the U.S. markets. Previously, he held the view that investors should be overweighted in the U.S. because of the nation's lead position in the economic cycle. "Europe and emerging markets offer better value and have similar or more upside," he wrote in the research report. Wall Street outperformed most other markets last year, including a mammoth rally in the last three months of the year, giving the U.S. a loftier valuation and more risk than Europe or emerging markets, he argued.

Although the European stock market is far from "bargain basement" levels, earnings growth projections are less optimistic in Europe, Merritt wrote. "Europe may not be trading at Asia's discount, but the gap with the U.S. has rarely been wider. Currency considerations also support Europe relative to the U.S. if the momentum behind the seven-year advance of the trade-weighted dollar begins to fade."

Merritt contended that investing in emerging markets made sense because of structural changes that have been put in place, "including moves to flexible exchange rates, the development of domestic currency debt markets and more transparent and stable financial systems."

Salomon's main overweight positions in emerging markets are Russia and Turkey. The firm also likes Mexico in Latin America, but said it's probably too early to venture into Argentina, which has defaulted on its debt and is planning to devalue its currency. The regional price-to-earnings valuation is now 29% below its 10-year average, according to Salomon's Latin American strategist Geoff Dennis, who expects 17% earnings growth in the region during the next 12 months.

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In Asia, Salomon likes China, Korea and Hong Kong. Japan is still too risky. "Some movement in the area of banking sector reform is probably a prerequisite for engendering significant institutional investor interest," the firm stated. "It may be too early to go overweight Japan.

We are slightly underweight although

we suggest no financial exposure."

In general, stock returns could be more modest coming out of this recession than in previous recoveries, Merritt wrote, "suggesting 2002 may not be a 'buy-and-hold' year." The strategist maintained his opinion that investors should be overweighted in equities, relative to cash and government bonds.

As far as sectors go, Salomon downgraded the software group to underweight from overweight. Merritt kept his weightings on other key sectors, suggesting investors go light on pharmaceuticals and chemicals, while focusing on financials, media, telecommunications, metals and mining.