The eurozone has emerged from recession after a record 18 months of economic contraction.

European policy makers, central bankers and the region’s citizens surely felt relief on Wednesday when Eurostat, the eurozone’s statistics agency, revealed that the 17-country European Union had finally come out of its year-and-half-long recession.

There’s another group of people who should thrilled to see the eurozone economy finally growing again: retirement savers.

Over the last two years European stock markets have lagged a number of other markets. Since May 2011, which was shortly before the recession and just prior European markets tanking, the US’s Standard & Poor’s 500 index is up 34%, while the Euro Stoxx 50, an index that tracks blue-chip eurozone companies, is down 5%.

Individual country performance has been mixed — but still below the S&P — with Spain’s Ibex 35 falling about 14%, France’s CAC 40 up 8% and Germany’s DAX up 21%.

But as the eurozone begins to grow again, retirement accounts around the globe could get a big boost. Public companies, and their stocks, are likely to see some gains as the economy improves, investment professionals said.

Most diversified investment portfolios will have some exposure to Europe and because European stocks have been seen by some as cheap, it’s likely that exposure has increased since the eurozone recession began. That could be a boon for retirement savers who have added European stocks to their portfolios.

Investors adding European stocks

Two years ago Mouhammed Choukier, chief investment officer at London-based Kleinwort Benson, which manages US$7.4 billion, had no client money exposed to Europe. He began adding European stocks in the first quarter of 2012 and now his clients’ equity portfolios have about a 20% allocation to the region, excluding the United Kingdom.

Choukier is confident that his clients will see their savings tick higher the healthier Europe becomes.

“Without a doubt we think returns will increase,” he said. “We think that over the next couple of years European equities could push ahead and realize some value.”

Norman Raschkowan, vice-president of investments for Toronto’s Mackenzie Investments, has also increased his allocation to European stocks. The region now accounts for about 20% of the non-Canadian equity portion of his funds, up from less than 10% two years ago.

According to EPFR Global, a Cambridge, Massachusetts-based firm that tracks global mutual fund inflows and outflows, over the last six weeks $7.1 billion has flowed into European funds. That’s the best six-week run the region has had since April 2008.

Investor confidence and an improving economy has a lot do with the change in fund flow direction, but if you have a diversified portfolio your allocation to Europe — both in personal portfolios and pension funds — has also been increasing because the region is cheap relative to other markets.

On a price-to-book basis, Europe is trading at a 25% discount to its long-term average, said Choukier. Spain is trading at a 45% discount, while Germany is trading at a 15% discount. On a 2014 price-to-earnings basis — a key valuation that shows how much investors are willing to pay for each dollar of a company’s earnings — the Stoxx 50 is trading at 10 times earnings, while the Dow Jones Industrial average is trading at 11.7 times earnings.

Stephen Lingard, managing director of Franklin Templeton Multi-Asset Strategies, manages funds for Asian and European clients and he, too, has increased his allocation to Europe. He believes that as valuations climb closer to their historical norms — something he said should happen over the next 6-to-12 months — investors will get a good boost in returns.

But Lingard cautions investors not to get too carried away. Just because Europe has had a couple of quarters of growth doesn’t mean the region is problem free. Lingard is still concerned about high unemployment and worries that improving markets could cause policy makers to take their eye off many issues that are still pressing.

Still, Choukier believes that over the next seven years, Europe will give investors an annualized 8% total return per year, versus the 5% he projects for American markets.  

Not too late

For investors who have little or no exposure to the region, Choukier said it’s not too late to buy in. He recommends purchasing an exchange-traded fund that tracks the main European indexes.

Raschkowan said that certain sectors, such as auto parts or pharmaceuticals, offer opportunities, too.

If you want to own individual company stocks, Lingard said the best bet is to look for companies with a headquarters in Europe, but business and product sales around the world. These companies tend to be less susceptible to volatility because they operate in other jurisdictions.

“The best time to own risky assets, like Europe, is when a country is coming out of a recession,” said Lingard. Take the US, for instance. Since the recession ended in June 2009, the S&P 500 is up 81%.  

“When you get better economic data, you get big gains,” he said.