There have been so many dislocations the crisis-hit eurozone in recent years that equities in the region offer long/short hedge funds some of the largest investment opportunities in a decade, according to the manager of the RWC Europe Absolute Alpha Fund, Ajay Gambhir.

In a statement on the outlook for his fund in 2013, Gambhir says he is optimistic about this asset for two reasons. First, the disruptions in European equities have been so severe that the opportunity for long/short investing between sectors and stocks is greater than it has been for almost 10 years. Secondly, the gap in value between European equities and European corporate credit opens up the opportunity for money to rotate into European stocks, with the greatest benefit to accrue to higher yielding European stocks.

“Europe is looking increasingly attractive; inflation expectations have stabilised and equities are cheaper than usual compared to the US. The ECB's bond-buying plan means they are ready to stand behind the euro, reducing the tail risk. Credit investors having been moving up the risk curve so, logically, the next large opportunity is for money to rotate from credit into equities, given the large valuation gap,” Gambhir said.

Recent survey evidence suggests investors remain wary about eurozone equities and the associated economy. According to the Bank of America Merrill Lynch poll of global fund managers in January, issued earlier this month, investors see fewer risks in the eurozone from some quarters, such as Italy, but are also concerned about other countries, such as France and Spain. 

Although global growth expectations saw a jump in January, European expectations did not follow suit. While a net 8 per cent of panellists expect a stronger European economy this year, almost half (48 per cent) still see the risk of recession as a serious threat, the BoA Merrill Lynch poll showed.