JPMORGAN: The Only Way The 'Buy Europe' Trade Will Work Is If Everybody Does It

Buying up European stocks has become the hottest trade in the world in recent weeks, as investors have poured billions of dollars into the asset class.

The plunge into European markets has been accompanied by a surprise improvement in economic data across the region, which for years has been showing the effects of a prolonged recession brought about by the euro crisis.

By early August, strategists like Oppenheimer's John Stoltzfus were saying things like this (emphasis added): "Stateside investors are beginning to consider investments in Europe and elsewhere ex-U.S. for diversification once again as multiples expand stateside and hints that conditions are beginning to improve outside of the U.S., particularly in the developed European markets, emanate. It appears to us that investing in Europe today might be parallel to investing stateside just a few years ago ahead of the big run-up."

By mid-August, weekly fund flow data made it clear that investors were pulling money out of U.S.-oriented equity funds and putting it into European funds.

"Largest weekly inflows to European equity funds in more than 2 years ($2.3bn) confirms Europe back in fashion," said BofA Merrill Lynch chief investment strategist Michael Hartnett at the time.

Shortly thereafter, the Société Générale global asset allocation team, led by strategist Alain Bokobza, made a bold call: "European equities should enjoy net inflows of $100bn soon."

Since then, we've seen continued outflows from the U.S. - and equity funds around the globe - while the one region consistently receiving inflows, week in and week out, has been Europe.

So, is all of this newfound optimism toward Europe on Wall Street a cause for concern?

JPMorgan equity strategist Mislav Matejka clearly thinks not, judging by a note sent to clients today (emphasis added):

Clearly the constructive view on Europe is these days an extremely crowded call. Is it a worry that almost every single sellside research department has in the past few weeks moved Europe to [overweight]? We don't think that one should be a contrarian here. We believe that the consensus nature of this call might actually increase the chances of it working. The region did poorly for so long, leaving many burned, that one needs a decisive shift in sentiment to challenge the entrenched bearish positions.

That kind of language may set off alarm bells for the more contrarian-minded thinkers out there.

To be sure, the "buy side" - hedge funds, money managers, and the like - aren't sold on the Europe story yet, according to Matejka:

We don't find buyside to be as enthusiastic with respect to Europe. Importantly, investors are concerned by the lack of any stabilization in EPS revisions. We think this is crucial. A bottoming out in EPS revisions could turn the remaining scepticism toward the region.

So, when should investors expect revisions to bottom out?

"We believe that current levels of PMIs are already enough for positive EPS growth," says Matejka. "For the revisions themselves to turn outright positive historically we needed higher PMIs, in the 54-55 range. We are not far from these levels any more, and the forward looking PMI components look encouraging."