(FORTUNE Magazine) – Few events hold as much potential for gains as the coming economic unification of Europe. Though there are still plenty of stumbling blocks, analysts figure that a successful integration could add as much as 6.5% to the EC's gross domestic product over the rest of the decade. Then there is the expected gain from new trade with the old communist bloc. Notes Marcus Grubb, European Equity Strategist at UBS Phillips & Drew in London: ''Europe will be one of the most profitable places to invest in the 1990s.'' (For more on Europe's prospects, see Special Report.) European stocks tend to sell at slightly lower price/earnings multiples than American shares. But even that understates the value you get for your dollar. Old World accounting favors reporting lower earnings because of high corporate taxes. This keeps P/Es higher than they would otherwise be. When the stocks are measured on the more comparable basis of price to cash flownot hyphed in final chart per share, European markets are even more of a bargain. The stock markets listed below sell at an average P/E that is 28% less than the average U.S. P/E. But the price to cash flow multiplenot hyphed in chart of the European markets is a full 41% lower than the stateside multiple.

A Europe-bound investor has two ways to go: Buy single stocks through American Depositary Receipts (ADRs) or buy into an entire market through a closed-end country fund. These funds, which hold stocks of a particular country, have their own shares listed on a U.S. stock exchange. A sharp-eyed investor can often snare them when they are selling at a discount to net asset value (NAV), which is the value of the shares they hold in the portfolio. Says Michael Porter, Smith Barney's country fund analyst: ''The name of the game is to invest in an undervalued market through a fund that is trading at a larger than normal discount to NAV.'' That way, he says, you have two ways to win. Though Europe's economies have slowed lately, analysts are expecting a strong profit rebound in 1992 and beyond. The Portugal Fund, which is selling at a 6% discount to NAV, is just about the only easy way to get into one of the most promising markets in Europe. While the Portuguese economy has cooled somewhat from its torrid pace of recent years, its longer-term growth prospects remain superior to all other economies in the EC. Spain, another bulb in the Garlic Belt, promises tasty returns as well. While enjoying 2.5% annual economic growth, Spain's government has managed to bring down inflation and reduce its budget deficit. Income from tourism, which stands at around $20 billion for 1991, should leap $7 billion next year on the back of the Barcelona Olympics. One likely beneficiary of spendthrift sports fans will be the Growth Fund of Spain, which trades for 10% less than its NAV. There's a growing list of funds that offer single-country plays on France and Germany, the Continent's two biggest bourses. Of these, the France Growth Fund and the New Germany Fund, both selling at discounts, offer the cheapest ways in. Says Malcolm Clinger, chief investment officer of Swiss Bank Corp. in New York City: ''Both markets are very promising.'' Investors who hope for more bark from their mark may want to look at American Depositary Receipts for shares in individual German companies that stand to benefit from unification and from the reconstruction of Eastern Europe. Mannesmann is a favorite among Euro-analysts. The company builds machinery and factories; it is also the world's biggest and lowest-cost producer of oil pipes, with the largest potential customer in the world, Mother Russia. A promising play in France, analysts say, is Alcatel Alsthom, the telecommunications equipment company. One of the two suppliers for the rebuilding of the East German phone system, Alcatel recently formed a joint venture with a Polish company to supply telephone switching equipment. Anita Hibbert, an analyst at Smith New Court in London, thinks Alcatel's P/E of 8.6 times estimated 1992 earnings is too low, given the company's bright prospects. Alcatel's ADRs trade over the counter in the U.S. Since no country fund exists for the Netherlands, you almost have to buy ADRs to invest there. The choice is simple: Royal Dutch/Shell by itself accounts for 40% of the market capitalization in the Netherlands. Analysts ( think the company can pump out 16% earnings growth next year. Prospects also look good for Unilever, an Anglo-Dutch food company. Just helping to feed the 139 million hungry souls in Eastern Europe, reckons Sylvain Massot, Morgan Stanley's food analyst in London, could add two to three percentage points to the annual earnings growth of big, brand-name food companies like Unilever over the next 20 years.

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