The best bet in Europe

Recent global jitters over the prospect of higher interest rates in the US, along with profit-taking, have taken their toll on Europe: the pan-European FTSE Eurofirst 300 index has slid by more than 5% from its three-year highs over the past three weeks. But, say analysts at ABN Amro, that doesn't mean you should be bailing out.

The factors behind Europe's gains earlier in the year - corporate cost cutting, restructuring and exports supported by global economy - all look likely to endure next year, says the bank. At the same time, earnings forecasts appear conservative and the ECB is unlikely to raise rates until there is evidence of a sustainable recovery. Europe is also cheaper than other major developed regions, on a pe of about 13 and a dividend yield of almost 3%.

And the best market of all in Europe? Germany, Francois-Xavier Chevalier of the French brokerage CIC told Handelsblatt. There, shares are priced on an average pe of under 13, despite impressive forecast earnings growth, with Germany's biggest 110 companies expected to post average profit gains of 42% in the third quarter, compared to 17% Europe-wide. Profitability has been boosted by pervasive corporate restructuring over the past few years, with labour costs down 10% compared to the eurozone average since 1999. Given all this, Commerzbank's Ralf Groenemeyer thinks German stocks can continue to do well, whatever happens to the US market. The bank's year-end target for the Dax is 5,250, 7% above current levels.

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Not everyone is completely convinced that Germany is a safe place to invest, however. Morgan Stanley's Ronan Carr points out that Germany is a "geared play" on the global economy, thanks to the heavy weighting of cyclical stocks in the market. That implies that a US downturn could pose a risk as long as eurozone growth remains weak. Japan is another market that is seen to be particularly exposed to the global growth outlook. As Finanzwoche notes, Wall Street does need to be "reasonably stable" for Japan and Germany to flourish. Still, as far as Japan is concerned, the key reason for optimism is that this economic recovery is being underpinned by domestic strength, not just by exports. As this realisation spreads, it seems reasonable to hope that the Japanese market's long-term upswing will prove more resilient to weakness on Wall Street over the next few years.