If U.S. companies are selling at a discount, then equities in Europe are in fire-sale mode. That is producing lots of investment opportunities for those able to look beyond the current economic horror story.

In fact, the recession-induced bear market is offering up a buffet of stocks in Europe for bargain-hunters, says Dana Love, lead manager of Europlus Fund, sponsored by Toronto-based Invesco Trimark Ltd. The bad economic news is reflected in current stock prices, resulting in some excellent deals for clients with a long-term view.

“There are, literally, opportunities everywhere,” Love says, “with some of the very best companies that the world has ever produced now on sale.”

The gloomy picture of Europe is not surprising, considering the degree to which big European banks were involved in the U.S. subprime mortgage crisis. There is also shrinking foreign demand for Europe’s exports; slowing consumer demand; several regional housing bubbles; rising unemployment; and, most recently, fallout from the alleged Bernard Madoff investment fraud.

The European Central Bank has predicted that real gross domestic product will shrink by 0.5% in 2009, which will be the continent’s first full-year contraction in 15 years. The news has not gone unnoticed by money managers. By September 2008, Europe had achieved the unfortunate status of most unpopular destination for equity investing, according to a monthly survey of 196 global fund managers by New York-based Merrill Lynch & Co. Inc. Results of the December survey show that although attitudes toward Europe are improving, many money managers still remain gloomy about the Eurozone’s prospects, with many portfolios underweighted in European stocks.

Love argues, however, that the European investment community is overly pessimistic and tends to have more of a herd mentality than North American investors.

After a decade of restructuring, which has helped countries experiencing sluggish growth, excessive bureaucracies, high taxes and uncompetitive labour laws, Love believes Europe should be positioned to take advantage of the global economic recovery.

The ECB has taken the first step, with measures to get banks lending more money, which would then unleash some capital for business and consumers.

While waiting for evidence that those measures are bearing fruit, portfolio managers are positioning themselves for recovery. They are reducing defensive positions in health care, pharmaceuticals and both the consumer staples and consumer discretionary sectors and increasing weightings in growth-oriented stocks.

In the December Merrill Lynch survey, European money managers said they had reduced overweighted positions from the previous month by 15% in health care, by 11% in food and beverages, and by 8% in utilities. These reductions have been relatively easy to make because of the success the money managers had had in these sectors, which is allowing them to take profits and redeploy the proceeds.

Money managers are finding deals in financial services, particularly insurance, which, the Merrill Lynch survey says, is the cheapest sector in Europe. Almost 30% of money managers reported that they are overweighted in the sector.

Telecommunications firms are also well liked, with slightly fewer than 60% of managers overweighted in the sector in December. Martin Fahey, general manager and partner with I.G. International Management Ltd. in Dublin and lead manager of Investors European Equity Fund, sponsored by Winnipeg-basedInvestors Group Inc., has increased his fund’s weighting in telecom over the past six to nine months.

For his part, Love likes the prospects for the health-care sector: it has strong growth potential because health care is a needed service. He is happy that he can now buy top companies that he has long admired, such as Roche Holding Ltd. of Switzerland, at reasonable prices. His fund also holds Swiss pharmaceutical company Novartis AG.

Fahey adds that Novartis is an example of a European company that has had no earnings downgrades.

Cyclicals aren’t yet popular. The December survey shows that European money managers were moving out of basic resources and oil and gas, even though oil prices had dropped by 60% in the past three months. The managers have gone from overweighting basic resources in June to underweighting them by the end of 2008.

For example, Fahey points to London-based miner Rio Tinto PLC. It lost 78.5% in 2008 and could present an interesting buying opportunity. However, Fahey is not ready to return to loading up on cyclical stocks until it appears the economy is closer to recovery.

@page_break@But Karen Olney, lead European equities strategist with Merrill Lynch in London, says cyclicals should not be overlooked. “Without any fresh allocations to the deep cyclical sectors, investors could be caught wrong-footed and miss out on a potential bounce-back in commodity prices and additional fiscal stimulus targeted at infrastructure,” she says. “If the world economy has just experienced a heart attack, infrastructure spending could be the defibrillator that charges it back to life.”

Of course, money managers aren’t just looking for safer sectors; they are seeking safer countries. Fahey says the housing bubbles that developed in Spain and Ireland are causing him to underweight those countries. But the Investors European fund is overweighted in France, which has a more diversified economy, and in Germany, which didn’t have a housing bubble.

Germany is not only Europe’s largest economy but also its strongest. Germans have been less reliant on credit than consumers elsewhere, and they didn’t engage in the frenzied subprime borrowing practices that took place in the U.S. There was no boom and bust in the German housing market.

In Germany, it’s common to rent a home rather than own one, says Greg Gigliotti, senior portfolio manager with New York-based Trilogy Global Advisors LLCand manager of CI European Fund, sponsored by Toronto-based CI Investments Inc. Slightly less than a third of the CI fund’s portfolio is in German stocks despite the country’s sizable dependency on exports, which are faltering during the global slowdown.

Gigliotti also likes Britain, despite its current challenges. It accounts for 22% of the CI fund’s holdings. Gigliotti believes the country will lead Europe in the recovery, thanks to aggressive intervention by the British government that will result in strong benefits to consumers.

“Britain has more potential than continental Europe,” Gigliotti says. “We believe it will be an early beneficiary.”

Gigliotti points to clothing chain Next PLC as an example of a British company that will benefit when consumers return to the tills, along with Spanish retailer Zara International Inc., which manufactures low-cost imitations of high-end fashions.

Fahey agrees that Britain is starting to look “interesting,” especially some consumer names.

However, Gigliotti says, when buying companies with an eye to recovery, it’s important to choose those that already have strong balance sheets and are not credit-dependent.

Love does not target specific countries, but sometimes ends up with substantial holdings in one particular nation. At the moment, the Invesco Trimark fund’s five top holdings are all Swiss-based companies: food giant Nestlé SA and Aryzta AG, a specialty baker, lead the group. They are followed by three health-care companies: Roche, Novartis and Synthes Inc., a global medical device company that is positioned to benefit from an increasing need for technology used in trauma surgery, driven in part by increasing affluence in emerging markets. (More motorized vehicles will result in more road accidents.) He also holds a sixth Switzerland-based company, Schindler Holding Ltd., in his top 10 list. IE