Are European equities a diversification opportunity?

But senior analyst Michael Joynson admits that it is presently hard to win GCC investors away from local equity markets where returns have been stellar in recent months.

'This is a pattern I have seen in many emerging markets in the past with the injection of massive liquidity into illiquid markets. Our argument to investors is that they should consider taking profits at this stage and making a more conservative investment.'

Mr. Joynson thinks European equities, not the UK or US, are the place to park some funds. His reasoning is that the average price-to-earnings multiple for European large-cap stocks is an attractive 13.5 while the average for the past 10 years is around 20.

'In Europe there is no consumer bubble like that seen in the US and UK,' he contends. 'And the economic cycle is in a different phase entirely. We are seeing lots of restructuring in Europe and Eastern Europe is forcing Western Europe to change, particularly in the labour market.'

On the other hand, Mr. Joynson also realizes that the presentation of Europe as an unrecognized opportunity is predicated on an optimistic outlook for global growth. 'If there is a global recession instead, then things will be completely different,' he notes.

Investors from the GCC also have to ponder the currency implications of investing in the euro zone. For if the dollar was to suddenly recover then euro assets bought now would drop in value in dollar terms. Conversely, buying euro assets today would be a good idea if the dollar fell further tomorrow.

However, it has to be admitted that investing in the largest European companies during a downturn in their stock market fortunes does make clear investment sense. These are not companies that are likely to vanish, and indeed in an economic recovery and market consolidation phase, they should be among the best performers.

At the moment Mr. Joynson says most investors are choosing to buy funds with a guaranteed capital protection element. This means that the downside risk is eliminated entirely, but the upside potential also suffers from the investment dilution of the zero-coupon structure; even currency risk can be hedged.

Overall, his message of caution to local stock market investors is a very solid piece of advice. Those that take it and diversify into European large-caps will probably not regret it.

Why not follow the example of the Dubai Government which bought a stake in DaimlerChrysler recently, and diversify into big European stocks?