Investing in Europe-specifically Western Europe--seems mundane. During the late, great global bull market earlier this decade, the U.S. was growing, the emerging markets (including Central and Eastern Europe) were roaring, and even Japan's persistent malaise was an interesting story line.

Western Europe? Sure, the region is the driving force behind the 27-nation European Union, the world's largest economic entity measured by gross domestic product. And its economy is traditionally viewed as a steadier ship than the one in the U.S.--not as dynamic, but not as volatile either.

But such steadiness lacks sexiness, and it didn't shield investors from pain during the recent downturn. The E.U. was P.U. and the U.K. was less-than-O.K., and about the best you could say for Western European markets is that the collective group fared better than their former high-flying cousins in Central and Eastern Europe.

But some money managers believe Western Europe now offers compelling investment prospects, even if the region lacks scintillating growth prospects. "I think of all of the geographies we deal with, Europe is perhaps less exciting than the others in terms of earnings potential," says William Fries, lead manager of the Thornburg International Value fund. "But it is an exciting value opportunity."

Others concur. "Considering Europe's zero population growth, which will probably go negative in five to ten years, there's no demographic impetus for growth," says Martin Jansen, senior portfolio manager at ING Investment Management. "And that's enough to shave 1% from Europe's future growth rate. As society gets older, it gets more conservative in a financial sense. That means less inclination to consume and take on debt, which impedes growth."

Nonetheless, he adds, "There are certain times when cyclical valuation plays are attractive. And Europe now represents one of those times for the valuation argument. Depending on what base you use, in 2010 you're looking at Europe being about 10% to 15% cheaper than the U.S."

Signs of Life
Led by surprising-yet still modest-gains in France and Germany, gross domestic product (GDP) growth in the 16-nation euro currency zone shrank at an annualized rate of 0.4% in the second quarter. That was a dramatic improvement from the 9.7% annualized contraction rate in the prior quarter. In aggregate, the entire 27-member EU's GDP contracted at an annual rate of 1.2%. That's roughly on par with the U.S., which fell at an annual rate of 1% during the second quarter.

France and Germany helped pick up the slack for laggards such as Spain, Italy and the United Kingdom, which face a variety of issues ranging from weak exports markets to busts in the financial and housing markets. And many Eastern European countries remain troubled by plunging exports, high current-account deficits and bloated debt levels.

In short, Europe isn't a monolithic bloc. And that requires selective investing.

"We don't play the European demographics, or the U.S. demographics for that matter," says John Maxwell, manager of the Ivy International Core Equity fund. "You can't bet on significant improvements in purchasing power in Europe. But I think people should have exposure to Europe because there are a lot of great companies that aren't necessarily tied to that economy."

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