By Ankika Biswas and Ankita Yadav

Sept 22 (Reuters) - European equity markets are drawing

fresh interest from global investors, as resilient returns and

cheaper valuations offer a compelling case for diversification

beyond Wall Street.

Amundi, Europe's largest asset manager, and M&G Investments

are among firms reallocating portfolios toward the region.

Amundi has rebalanced its long-equity positions into Europe,

Japan and emerging markets since late-2024, while M&G - which

oversees about $395 billion - is "overweight" European stocks

and "underweight" U.S. peers.

European stocks are "a way for us to diversify (while still)

staying risk-on," John O'Toole, global head of multi-asset

solutions at Amundi, which manages $2.6 trillion, told the

Reuters Global Markets Forum.

Fiscal policy initiatives, such as Germany's

500-billion-euro infrastructure fund, exempt from its strict

debt brake, and the euro zone's pledge to lift defence spending

to 3.5% of GDP under NATO's new targets, are boosting sentiment.

O'Toole described these fiscal initiatives as

"game-changing", adding that central banks also continued to

support the real economy.

Europe's benchmark STOXX 600 has climbed 9.2% this

year, bolstered by a 62% surge in aerospace and defence

stocks. That compares with the S&P 500's 13.3%

gain, largely powered by AI-related momentum. Even so, Europe's

valuations remain comparatively cheaper: the STOXX 600 trades at

15.6 times forward earnings, versus 25.3 for the S&P 500, LSEG

data showed.

The valuation gap between U.S. and European markets has been

long-standing and driven by differences in sectors, funding

costs, accounting rules, incentives and regulations. The

historical gap, along with other factors, is presenting an

attractive diversification opportunity.

Europe's fiscal outlook is getting better, said Stephen

Parker, co-head of global investment strategy at JPMorgan

Private Bank. "(It's) a market that is trading at a significant

discount to the U.S., and offers a meaningfully higher dividend

than the U.S."

Fabiana Fedeli, chief investment officer of equities,

multi-asset and sustainability at M&G Investments, said the

valuation gap is leaving "mispriced opportunities" in sectors

overlooked by global investors. She pointed to energy

infrastructure and diversified financials alongside technology

and healthcare.

"We do invest in defence, but many companies in Europe have

been performing strongly on other trends, less noticed by the

wider investor community," she said.

However, risks remain for European markets, including U.S.

tariffs on goods such as automobiles and steel, currency

fluctuations affecting price competitiveness, economic

slowdowns, investment challenges and uncertainty surrounding

fiscal policies.

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