Don't Miss the Real Rally - TheStreet

If Thursday's action was an aberration and the U.S. markets have actually

begun to rally, then investors are sure to jump back into

New York Stock Exchange



stocks like it's 1999 all over again.

If they do, they might miss out on a real rally -- in Europe.

That, at least, is the conclusion of a new report by

Salomon Smith Barney's

European analysts based in London. The firm predicts strong performance in European markets over the next 12 months. In fact, the firm says "recent continental European outperformance of U.S. equities is likely to become even more pronounced." (The authors of the report, reached in London, declined to speak to


about their conclusions, referring reporters to the report itself.)

They make a strong case. They argue that U.S. growth is slowing, while Europe's is still strong and that growth in the region will be less affected than other parts of the world by a U.S. slowdown. In addition, they note the sickly euro's recent rise, which would continue if U.S. growth slows and would attract more cross-border portfolio flows to the region. Over the long term, they point to a number of factors that will increase both institutional and retail flows into the markets by hundreds of billions of dollars. That money should buoy the markets.

Indeed, this year Europe in general has outperformed the U.S. The benchmark German

Xetra DAX

index is up 4.4% this year, while the Dow is down 10% for the year and the Nasdaq is roughly at the same place it was at the beginning of the year. Elsewhere, France's


index is up 9.4% and Sweden's

Stockholm General

index has risen 7.5%.

Part of this can be explained by renewed economic growth. Even Italy and Germany, which comprise about half of the eurozone economy, are on their way to growth and the

Organization of Economic Cooperation and Development

recently raised its projections for eurozone growth for the year to 3.5% from 2.8%.

And part of it is timing. Europe didn't have as many Internet and tech shares during the inflation of the New Economy bubble, so there weren't as many to drag indices down when the bubble popped in March.

European mutual funds have reflected these gains. The best-performing fund this year has been the


Deutsche Asset Management European Equity Fund. It is up 89.6% since the beginning of the year; it has a $2,500 initial minimum investment and a 1.5% expense ratio. The


Ivy European Opportunities Fund is up 33% this year. (It requires a $10,000 minimum investment and bears an expense ratio of 1.93%.) The


Flag Investors European Mid Cap Fund is up 19.3% this year. (It requires an initial investment of $2,000 and carries an expense ratio of 1.6%.) Overall, as


Mark Young

mentioned recently, European mutual funds have risen 31.3% over the past year, while U.S. diversified equity funds are up 22.6%, according to

Lipper Analytical Services


Of course, U.S. investors have a plethora of choices when it comes to investing in Europe, from individual companies listing in the U.S. to single-country mutual funds to regional funds. Among the companies that Salomon Smith Barney recommends are

BP Amoco









The authors of this report may be ensconced in London, but they don't have a track record of being starry-eyed about the region. "This is the most bullish 12-month outlook we have had since 1998," they say, and as recently as March they were much more cautious.

Of course, they are not the only ones making the bullish-on-Europe case.

Steven Nagourney

, chief investment strategist for

Cantor Fitzgerald




recently pointed out the strong economic environment in Europe. But the Salomon report was as blunt and straightforward a bull case for Europe as I've seen recently. (OK, it's summer time and maybe my idea of fun beach reading -- country outlooks -- seems a bit wonkish, but somebody has to do it.)

To be sure, others are less enthusiastic.

"We're in a valley where the market has peaked, yet rate hikes may not have," says Hasan Tevfik, European Strategist for

Credit Suisse First Boston

in London. Tevik prefers staying in the defensive stocks in both Europe and the U.S. for the time being. And

Chase Securities

this week predicted that the euro, down about 20% against the dollar since its debut, is about to head back down again, which, if correct, undermines Salomon's argument.

The skeptics, as well as the provincial, might be inclined to agree with Tevfik. After all, the big "what ifs" are still out there. What if the


surprises everyone and raises rates in June? What if the U.S. landing is hard?

There is no question a weak U.S., which is something another Fed hike could create, will not bode well for Europe, or the rest of the world for that matter. The U.S. is a big market for Europe's exports. But in that scenario, momentum will be with European growth, as opposed to momentum against U.S. growth. That should augur well for the region's stocks, at least on a relative performance basis.

Europe may not be as invulnerable as the Salomon report suggests, but it still looks like a good bet.

David Kurapka's Global Portfolio column appears Mondays, Wednesdays and Fridays on TSC. In keeping with TSC's editorial policy, he does not own shares in any companies or mutual funds mentioned in this column. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at