Political risk has risen in recent weeks, renewing doubts that Europe will be able to come together and deal with its sovereign debt crisis. Some investors will inevitably see any further deterioration in the crisis as proof that the failure of the euro is unavoidable.

“European equities are unloved and out of favour. But in this lies an opportunity”, says JP Morgan

However, according to a recent JP Morgan paper, authored by Stephen Macklow-Smith, a senior portfolio manager in the firm’s European Equity Team, eurozone countries are actually moving to integrate rather than split apart.

“The fiscal compact is one example of eurozone countries’ steps to integrate, but governments are talking more openly about greater fiscal coordination, including some form of banking union and even the introduction of so-called Eurobonds.”

Furthermore, while recognising the significant challenges, JP Morgan also highlights the opportunities that currently exist for long-term investors, with European equities out of favour and valuations at historic lows.

“Europe’s focus on austerity to tackle the crisis is delivering results. Most noticeably, public spending cuts and tax rises are helping to cut budget deficits dramatically. In aggregate, the eurozone fiscal deficit is now much smaller than in the US or the UK – a fact that is often not acknowledged.”

Also overlooked are the significant supply-side reforms that are being introduced by peripheral governments as part of their austerity programmes, says JP Morgan. “Labour laws are being relaxed, the pension age is being raised and public sectors are shrinking in Spain, Italy, Portugal and Ireland.”

While acknowledging that the weakening global economic backdrop is problematic for corporate Europe, as a large proportion of European companies are dependent on exports, there are, nevertheless, some good reasons to believe that earnings can hold up, says JP Morgan.

“First, European exporters are benefiting from the weakness of the euro, which has declined significantly in trade weighted terms since 2008 as the financial crisis and debt crisis have hit the currency.

“Second, emerging markets are becoming an increasingly important source of revenues for corporate Europe. Emerging market revenues as a share of total revenues have tripled since 2003 to around 30%, while North America’s share has fallen from nearly 20% to under 16% over the same period. This is important as emerging markets are likely to be the future driving force behind the global economy, even as the US recovery falters and Europe stagnates.”

In addition to this, says JP Morgan, valuations are very supportive at current levels, which could provide an opportunity for long-term investors.

“The Morgan Stanley Composite Valuation Indicator is currently at levels that have historically been a strong buy signal, while a dividend yield of around 4% on the MSCI Europe Index means European equities are yielding more than other equity markets and much more than German Bunds and US Treasuries.”

While the debt crisis clearly remains a major concern for investors, and further volatility is likely, given the political risks that lie ahead, Europe has the resources to deal with the situation and remains master of its own destiny, concludes JP Morgan.

“This is not to say that a solution will be easy. Restoring the competitiveness of the periphery will take a long time and the crisis will need to be managed firmly while reforms are being implemented. However, structural reform is taking place and rebalancing is happening.

“Meanwhile, European equities are unloved and out of favour. But in this lies an opportunity. European companies are positioned to benefit from global growth, with an increasing exposure to emerging markets, so any evidence of a pickup in economic activity will be positive for earnings. At the same time, valuations are cheap, providing a potentially attractive entry point for long-term investors.”

For UK-based investors looking to access European equities, there are a number of London-listed ETFs to consider, tracking a range of different indices.

The following six ETFs track the EURO STOXX 50 Index, Europe’s leading blue-chip index for the eurozone. The EURO STOXX 50 Index provides large-cap exposure to supersector leaders in the eurozone. The index covers 50 stocks from 12 eurozone countries: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain.

DB X-trackers EURO STOXX 50 ETF (XESC) TER 0.00%

HSBC EURO STOXX 50 ETF (H50E) TER 0.15%

Credit Suisse EURO STOXX 50 ETF (CS51) TER 0.20%

Lyxor ETF EURO STOXX 50 TR (MSEG) TER 0.25%

iShares EURO STOXX 50 ETF (EUE) TER 0.35%

EURO STOXX 50 Source ETF (SDJE50 GR) TER 0.15%*
*Listed on Xetra but UK registered with UK Reporting Status

The following two funds track the MSCI EMU Index. The MSCI EMU Index is a free float-adjusted market-capitalisation weighted index that is designed to measure the equity market performance of countries within the European Economic and Monetary Union (EMU). The index consists of the following 11 developed market country indices: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Portugal, and Spain.

Amundi ETF MSCI EMU (CMU) TER 0.25%

Credit Suisse MSCI EMU ETF (CEU1) TER 0.33%

The following fund tracks the FTSEurofirst 80 Index. The FTSEurofirst 80 Index offers exposure to the 60 largest eurozone companies measured by market capitalisation in the FTSE Euro zone Index and 20 additional companies selected for their size and sector representation.

iShares FTSEurofirst 80 ETF (IEUR) TER 0.40%

The following fund tracks the MSCI Europe ex-UK Index. The MSCI Europe Index is a free float-adjusted market-capitalisation weighted index that is designed to measure the equity market performance of the developed markets in Europe. The index consists of the following 15 developed market country indices: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, and Switzerland.

iShares MSCI Europe ex-UK ETF (IEUX) TER 0.40%

The following fund tracks the FTSE RAFI Europe Index. The FTSE RAFI Europe Index is designed to track the performance of the largest European equities, selected based on the following four fundamental measures of firm size: book value, income, sales and dividends. The index consists of stocks from the United Kingdom, France, Germany, Switzerland, Spain Netherlands, Italy, Sweden, Finland, and Denmark.

PowerShares FTSE RAFI Europe ETF (PSRE) TER 0.50%

The following fund tracks the performance of the equally-weighted version of the EURO STOXX 50 Index NR. The EURO STOXX 50 Equal Weight Index NR has the same constituents as the market-capitalisation weighted index (see above), but each company in the Equal Weight index is allocated the same weight (2% in normal circumstances).

Ossiam ETF EURO STOXX 50 Equal Weight NR (L5EW) TER 0.30%

Many of the above funds are cross listed on European exchanges including the Deutsche Borse, Borsa Italiana, Euronext, and SIX Swiss.