(FORTUNE Magazine) – Advice to investors contemplating a foray into Europe: Take the map of the continent, and cut a hole in the middle. Voyaging the periphery will be much more rewarding. You'll miss a few chateaus, but you'll also avoid the bleak economic landscapes of Germany and France. The best investing prospects, where currencies are cheap and economies awakening, are in Britain, Italy, and Scandinavia. How to get there: U.S. brokerages buy stocks on European exchanges for about the same fees they charge to purchase domestic stocks. Many European stocks also trade in the U.S. in the form of American depositary receipts. Or you can buy closed-end funds. Some, like Scudder New Europe, invest in markets across Europe, while others specialize in individual countries: the Emerging Germany Fund, Growth Fund of Spain, and the France Growth Fund, for example. All these recently sold at a discount to net asset value of 2% or more. Among leading open-end funds that concentrate on European stocks are DFA Continental Small Company (800-342-6684) and Fidelity Europe (800-544-8888). They returned an annual average of 8% and 7.8%, respectively, over the past five years. The outlook is particularly bright for countries that have cut their currencies free from Europe's exchange rate mechanism (ERM), and thus from the interest rate dictums of Germany's stiflingly conservative Bundesbank. Since Britain broke loose last fall, its economy has shown signs of growth, but its market has barely budged. Nigel Hankin, portfolio manager at Draycott Partners in London, estimates corporate earnings will rise 15% this year and expects stocks to fare well in the second half. He likes Grand Metropolitan, the food giant, whose ADRs traded recently on the NYSE for $26 a share. The United Kingdom Fund trades on the NYSE at a 9% discount to its net asset value. For adventure, consider Italy. So what if a tenth of Parliament is under investigation for corruption? Richard Davidson, a strategist for Morgan Stanley in London, exults: ''Reform is unstoppable. A cultural change is under way. Privatization and rationalization of industry has begun for real.'' Italy's economy is getting a kick from a sharp drop in the lira, which helps exporters. Strategist Nick Stevenson of S.G. Warburg Securities in London likes appliance maker Merloni Elettrodomestici and clothier Benetton Group. Merloni has no ADRs; Benetton's sold recently for $25 a share. Though the Milan stock exchange has risen 24% since January, the stocks have been such rotten investments for the past four years that they are still cheap, says Davidson. He calculates the market sells for 3.7 times this year's cash flow, vs. 6.1 times for the European average. For U.S. investors, Smith Barney closed-end fund analyst Michael Porter recommends the Italy Fund on any drop from its recent price of $11 a share, a hefty 17% premium to its net asset value. Warburg's Stevenson likes Scandinavian companies that benefit from the devaluation of the Finnish markka, the Swedish krona, and the Norwegian krone, particularly Enso-Gutzeit and Repola, Finnish papermakers that offer no ADRs. Other exporters with a newly competitive edge include Ericsson, a Swedish maker of communications equipment (its ADR recently traded for $44), and Nokia, a Finnish consumer electronics company ($15). Most analysts remain pessimistic about Germany and France; recent interest rate cuts by the Bundesbank may be too little, too late to jump-start the stalling economies. Carol Franklin, manager of the Scudder New Europe fund, expects disappointing earnings from French companies this year but is optimistic about the longer-term outlook because ''inflation is well under control, and companies went through a long period of restructuring in the late Eighties.'' She has 21% of her portfolio in France. True contrarians will opt for Germany, even though many companies are expected to report a decline in earnings for the fourth straight year. If you want to bet this market will come back, Porter of Smith Barney recommends the Emerging Germany Fund. It currently trades at an 8% discount to its net asset value. -- S.N.

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