Contrarian call? Why you should be wary on Europe

Investors need to be cautious on rotating into European equities, according to the CEO of an independent asset management group, who urged people not to get carried away with one of the main investment stories of the year so far.

“It’s fascinating: everybody is moving from the U.S. into Europe,” Alexander Friedman, CEO of Swiss-based GAM Holding, told CNBC Wednesday.

“I would caution that it might be overly positive. Because there is a huge amount of policy risk that hasn’t been priced into the market.”

U.S.-focused research tracker TrimTabs said Sunday that investors have been “shoveling record sums” into European equities this year, while shunning their U.S. counterparts. Warren Buffett has also been more bullish on the continent recently, snapping up a German motorcycle accessories retailer .

Meanwhile, Mohamed El-Erian, chief economic adviser at Allianz, called this focus the “only game in town” on Monday, as the European Central Bank (ECB) prepares to pump 60 billion euros ($ 67 billion) into the region’s economy this month.

Friedman – who was previously the global chief investment officer of UBS Wealth Management and has worked within the Bill Clinton administration – said GAM has been “pretty positive” on European risk assets for a while.

However, he added that there was a lot of dynamics not being addressed by the new investors in the market, such as a resolution to the ongoing Greek crisis and upcoming elections in Spain and Portugal.

“If you look at the way the market looked at Greece, just a week or two ago, it said: ‘Ah, it’s no problem, right?’ But Greece isn’t solved,” he said. “We’ve got a fiscal compact that puts pressure on Europe….France is highly uncertain.”

GAM’s clients are nervous about Europe, according to Friedman, with many opting to put cash into absolute return products. These are usually funds that aim to deliver positive returns in any market condition and don’t have a benchmark, however there is some debate about whether these products consistently deliver.

The current price-to-earnings ratio – an key metric used by investors – for the S&P 500 (INDEX: .SPX) is 19.61, while its only at 15.83 for the German DAX (XETRA: .GDAXI). A lower price-to-earnings ratio means a company’s stocks are considered cheaper when taking into account its earnings.

Statistics like this have led many analysts to believe that U.S. stocks are overvalued compared to their European counterparts.

Sheila Patel, CEO of Goldman Sachs Asset Management International, has urged a “selective approach” on European equities. She said that small- and mid-cap stocks – not just super-sized corporates – will get a boost.

While Kerry Craig, global market strategist at JPMorgan Asset Management, told CNBC last month that good dividend-paying stocks could be found in battered euro zone bourses.

The pan-European Euro Stoxx 600 Index (STOXX: .STOXX) has already clocked gains of 13 percent so far this year, while the S&P 500 has edged 2 percent higher.

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