By Trevor Hunnicutt
NEW YORK, Feb 9 (Reuters) - A spate of elections this yearthat threaten to change Europe's course and rattle thecontinent's largest political bloc and currency is normally thesort of uncertainty that scares away international investors.
Instead, deep-pocketed investors are buying into thecontinent's stocks - and trimming their stakes in the UnitedStates, where stock markets have been at record levels - in thehope some bargain shopping will pay off.
The 2017 calendar is marked with a series of Europeanelections in big countries that have put markets on the edge,including a March vote in the Netherlands, a two-round Frenchpresidential election that starts in April and a SeptemberGerman poll that Chancellor Angela Merkel has called her"toughest" test ever.
In each case - and in a possible Italian vote that could becalled by June - voters will likely have the opportunity tovoice support for anti-European Union or anti-euro candidateswho are seen as increasingly credible in the aftermath of theshocking June British "Brexit" vote to quit the European Unionand the election of U.S. President Donald Trump.
"We're not bearish on U.S. stocks, it's just more of apreference of where we'd rather be," said Kevin Lyons, a seniorinvestment manager at Aberdeen Asset Management PLC,noting that since late last year, his team has boosted its beton European stocks.
Aberdeen is not alone.
Fund managers increased their exposure to the Eurozone inJanuary more than any other investment category, according to asurvey conducted last month by Bank of America Corp of176 institutions that manage $455 billion in assets.
BlackRock Inc, which manages $5.1 trillion overall,has been scaling up its exposure to European stocks in severalfunds over the past few months, according to research serviceMorningstar Inc.
On Monday, BlackRock officially raised its outlook onEuropean stocks to the highest possible rating for the firsttime since last May, saying the risks are overblown.
By contrast, the asset manager is neutral on U.S. stocks.
LOW EXPECTATIONS
"It's far from consensus," said Richard Turnill, BlackRock'sglobal chief investment strategist, noting that the UnitedStates is growing but most investors already know that.
"What drives markets is surprise, and expectations forEurope are just very low," he added.
Growth, inflation and analyst forecasts for corporateprofits have picked up in Europe in the last year, but so toohas the prospect for a stronger currency and the withdrawal ofhistoric support from the European Central Bank's bond-buyingprogram, called quantitative easing.
Earnings would have to move higher to support a positiveview, Wells Fargo & Co's Investment Institute said in anote on Wednesday.
Yet a score of measures, including the widely usedprice-to-earnings ratio, suggest investors might be rewarded fora taking a risk now.
That ratio for the U.S. stock market is 17.67, following along bull market since the financial crisis, compared with 14.01for a group of European shares excluding Britain.
The difference between the valuation ratios is wider thannormal, ranking in the top 78th percentile, according to ananalysis of monthly Thomson Reuters data stretching back 20years.
TAKING NOTICE
Investors are taking notice. U.S.-based European stock fundsattracted $709 million in January, their first inflows in a fullyear and the end of the funds' longest drought on record.
By contrast, investors pulled $1.7 billion from domesticstock funds in the United States last month, according toThomson Reuters Lipper, a research service.
That said, U.S. stock exchange-traded funds pulled in $15.3billion during the latest week. But those funds are seen asrepresenting quick, tactical shifts, rather than strategic bets,in part because ETF users include hedge funds and otherinstitutional investors.
"It may be we're close to a short-term peak in politicalrisk across Europe," said Turnill. "For the first time inseveral years, I think we're seeing a change."
He said value is just one component too his faith in theEurope trade.
Global growth policies are likely to pump up Europeancompanies more than other developed markets because companiesthere are more exposed to cyclical regions, such as the emergingmarkets, and because European earnings are lower on average,giving each increase in revenue a relatively bigger impact onprofits, according to Turnill. (Reporting by Trevor Hunnicutt; Editing by Jennifer Ablan andAlan Crosby)
