(MONEY Magazine) – The Berlin Wall's fall last November raised more than hopes for finally reconciling Europe's post-Hitler halves. It upped the ante of perestroika, Mikhail Gorbachev's bold reforms of the Soviet bloc's crumbling economies. It also triggered one of the most dramatic diversions of international capital in decades. Consider: -- In the fourth quarter of 1989, U.S. investors alone made net purchases of European stocks totaling $2.5 billion, a fourteenfold gain over the same period in 1988. By far the largest of those net purchases were of German stocks, up nearly fivefold to $585 million. Yet that was a trickle in the global torrent of money inundating West Germany. For the quarter, net foreign funds invested in that country rose to a record $16 billion, three times the figure a year earlier.

-- In the first 10 months of 1989, indexes compiled by Morgan Stanley showed that U.S. stocks advanced 22%, vs. an 8% rise (in dollar terms) for European issues. Six months later, share prices were down 2% on Wall Street but up 11% in Europe -- Germany's 36% gain was tops among major markets -- as the dollar slid 8% on average across the Atlantic. (A sinking dollar inflates overseas returns, while a rising dollar deflates them.) -- In the six months to May 1, stock funds focused on European markets led all types of diversified portfolios with an average 14% gain vs. a 3% decline for stock funds overall and a 2% rise for internationals -- the main casualties of the Tokyo exchange's 28% fall. (For an analysis of the top Eurofunds, consult Fund Watch in MONEY's April 1990 issue.) Mutual funds are ideal for Americans who lack the expertise or resolve to become fluent in transatlantic stock picking. But the direct route is gaining popularity among seasoned shareholders eager to broaden their U.S. portfolios and profit horizons with European stocks. If you're one of them, begin by weighing the advice of the veteran Eurostrategists introduced below. They will not beguile you with travelogues of faraway bourses reveling in post- communism's la dolce vita. To the contrary, they know the investor's atlas of the Old World is being altered by powerful -- and unpredictable -- tectonic forces. Colliding with each other are movements for democracy in Eastern Europe, unification in Germany, and the integration of the European Community's 12 western economies by 1992. The challenge for Americans is to overcome a collective detachment from European markets and discover sensible ways to profit from the changes now transforming them. The most vexing issue is not the trend but the timing. For example, it could take as long as a decade to close the gap between low-wage Eastern Europe's vast potential and its current economic mess. To attract foreign investment, these countries must make their funny-money currencies convertible in the West via devaluation, which carries twin curses of rampant inflation and shortages of goods. To make products competitive on world markets, the East must break up state monopolies, close obsolete plants and suffer the consequences of rising unemployment and factory unrest. The hope is that this year's free national elections in most Eastern Europe nations will create governments with the legitimacy to ask their people to endure more economic pain. The danger is that the new leadership will buckle under the strain. ''I don't want my money in Europe when the Eastern Europeans suddenly realize that democracy doesn't quickly lead to prosperity,'' says Jim Rogers, a wealthy Wall Street dropout and Columbia University finance professor who anticipated big bull market moves in Austria, Germany and Spain in the mid-1980s. ''European markets could be at the mercy of massive uprisings in -- and immigration from -- the East that the Soviets will be powerless to contain,'' he adds. Rogers, 47, is no armchair investor. An avid motorcyclist, he departed from Ireland last March on an ambitious two-wheel, 20,000-mile grand tour of Eurasia that will take him to Japan and back again to Western Europe via Siberia by summer's end. Says he: ''German and Austrian stocks have soared on expectations of a huge flow of new orders from Eastern Europe, which has no money to buy anything. What's actually going to happen is a huge flow of funds to Eastern Europe. This will soak up excess capital that previously went into European stock markets, which I submit will be affected in an adverse way.'' A much more upbeat, though still realistic, case is made by David Roche, Morgan Stanley's European strategist in London. Money managers exploring Europe often cite Roche's farsighted research (first published in April 1989) on the interplay of perestroika and project 1992's single market, which he sees as the flip sides of a new Greater Europe coin worth owning for long-term gains. ''I think most stock markets reflect a peace dividend,'' notes Roche, ''in that investors know political tension is declining worldwide. Therefore, if Gorbachev is replaced or the cold war returns, then all stock markets would fall. You would not be protected in the U.S. any more than you would be in German shares. Only the dollar, gold and defense stocks would rise. If perestroika goes ahead, however, the market will clearly trend upward because what's not reflected in stock prices is the East's developing market of 428 million people -- and its positive effect on the growth and cyclicality of Europe's economies.'' Roche says investors should be vigilant for economic setbacks in the East -- and the ensuing buying opportunities. ''There will be horror stories that make markets go bump in the night,'' he predicts. ''But then, either you believe Communism is dead and won't be restored or you don't. My advice: keep the faith.'' YOUR STAKE IN PERESTROIKA To that end, Roche recently singled out the top perestroika plays in his European model portfolio of 89 stocks. Thus the seven he recommends (in three industry sectors in boldface type below) are viewed as chief beneficiaries of the marches toward capitalism in the East and a single market in the West. With the exception of Danieli, an Italian machinery maker, all are quoted (in local currencies) in the Wall Street Journal's overseas markets listings. As indicated below, four conveniently trade as American Depositary Receipts (ADRs) on U.S. exchanges or over the counter. Price quotes and direct purchases of stocks sold only on European exchanges can be handled by major full-service brokerages in the U.S. and discounter Fidelity Brokerage Services. Commissions are comparable to those on U.S. stocks. -- Information technology. Leaders in telecommunications, office equipment and electrical engineering should see fatter order books and profits as the East's vacuum-tube economies enter the electronic age. Roche recalls visiting a government ministry in Eastern Europe that had 3,500 employees but only one photocopier and no fax machine. ''These economies are dominated by industrial output of things people don't want to own themselves,'' he explains. ''But people want services, which run on technology and knowledge.'' He recommends two pioneers of East-West trade. France's CGE Group (lately 609 francs, or $108, on the Paris exchange) is Europe's titan of telecom, with $23 billion in annual sales. Germany's $36 billion Siemens (its ADR recently traded over the counter at $87) excels in office equipment, factory automation and medical technology. ''Over a third of Soviet hospitals don't even have running water,'' notes Roche. -- Capital equipment and transportation. The mid-century state of communist industry was neatly captured by last fall's TV images of East Berliners puttering across the border in their clunky, smoke-belching Trabants. Factories hatching such ugly ducklings are just as outdated. Roche figures it takes twice as much steel to produce a car in the East as it does in Western plants with efficient casting equipment. His favorite supplier of such machinery, with 30% of its orders from Russia, is Italy's $500 million Danieli. Buy its nonvoting savings shares (7,700 lire, $6.25), which sell at a 35% discount to the common and yield 3.1%. Also look for the auto, truck and rail divisions of Italy's Fiat to build on the $41 billion holding company's existing joint ventures in the East. Roche favors Fiat's preferred (ADR NYSE, $28) yielding 2.8%. -- Banking and insurance. Roche says large German institutions stand to profit most from the East's acute need for financial services, in part because of their dual roles as lenders to -- and major shareholders in -- local companies expanding in post-communist Europe. Such alliances provide big head starts for Deutsche Bank (ADR OTC, $443), the country's richest in assets, and the third- ranked Commerzbank (ADR OTC, $32). Similarly, he's keen on German insurers because perestroika should lead to greater privatization of property. ''If individuals own their homes, shops or factories,'' he reasons, ''the first thing they do is to insure them.'' Small investors, however, may be put off by the formidable share price of his Frankfurt-listed pick, Munich Reinsurance (2,125 marks, $1,266). Not to worry, says Marc Alexandre, head of Paris' Atlantic Finance, one of Europe's top independent research firms. He thinks Italy's biggest insurer, Generali (39,995 lire, $33), is equally well positioned to expand in the East. ''Until World War II, Generali was Central Europe's main insurer and still has strong name recognition there,'' he explains. ''Yet none of this potential is reflected in the stock price, as is the case with its competitors in Germany.'' Alexandre says other perestroika sleepers abound on the lethargic Milan exchange. The average stock sells at 3.4 times this year's cash flow vs. 6.3 for European and 7.6 for U.S. issues. One reason is that Italian savers are hooked on tax-exempt government bonds yielding 11.5%. Notes he: ''The Milan- listed capital-goods firms we follow are already doing more business in the East.'' He recommends $600 million Comau (4,800 lire, $3.90), a world leader in industrial robotics; and $400 million Sasib's savings shares (5,430 lire, $4.40), selling at a 27% discount to the common of this specialist in food- packaging equipment.

THE URGE TO SPLURGE Nigel Ledeboer, chief portfolio manager at G.T. Management in London, has been deluged with money since November. Total assets of the firm's 10 open-end Eurofunds have surged threefold to $2 billion. (G.T. Europe Growth, the only one sold in the U.S., gained 24% in the 12 months to May 1.) Last March another $240 million was raised for G.T. Greater Europe, a closed-end stock fund recently traded on the NYSE at $15, a 6.5% premium to the per-share net asset value of the fund's holdings. Ledeboer's new closed-end fund can and will invest aggressively in small, unseasoned, privately held companies -- even Eastern European (when that's possible, he adds). Initially, however, he's placing some long-term bets on anticipated stronger consumer spending on the Continent spurred by German unification and hordes of tourists en route to or from the East. ''French firms selling high-margin luxury goods will be among the biggest winners,'' says Ledeboer. He likes three brand names on the Paris exchange: Clarins (3,810 francs, $673), a $173 million maker of skin-care products; Remy Martin (379 francs, $67), a $624 million cognac vintner; and Yves Saint Laurent (1,155 francs, $208), the designer's $529 million fashion and perfume company. He's also impressed with the growth of Accor (935 francs, $166), a $2.6 billion hotel chain, and Canal + (ADR OTC, $31), a $934 million French pay-TV service expanding in West Germany, Belgium and Spain. ''Competition is finally coming to Spanish TV,'' says Ledeboer. Accordingly, he recommends a newly licensed TV broadcaster listed in Madrid: Antena 3 (2,100 pesetas, $20).

HIDDEN VALUES From Alliance Capital's London office, Glenn Wellman oversees a stable of four stock funds enlarged by March's $252 million offering of Alliance New Europe. The closed-end portfolio, a direct competitor of G.T. Greater Europe, recently traded on the NYSE at $10.50, a 5% discount to net asset value. ''Europe will be this decade's great long-term-growth story,'' predicts Wellman, who sees economic gains (after adjusting for inflation) of 4% to 5% a year in the 1990s, double the region's average during the roaring '80s. He believes that unrecognized bargains currently abound in Europe's fragmented auto components sector. Reason: most investors mistakenly view the group as unglamorous captive suppliers to their national auto industries. ''The stocks are already cheap relative to their steady earnings gains of 10% to 15% a year,'' he explains. Yet growth should accelerate as more Western and Japanese car companies rush to open plants and dealerships in Eastern Europe. Consider Volkswagen (ADR OTC, $66), Europe's No. 1 automaker and Wellman's hands-down favorite to grab the pole position in post-communist markets. In March the company agreed to invest $2.9 billion in a joint venture to assemble subcompact VW Polos in East Germany. ''While Volkswagen made headlines,'' he says, ''dozens of its suppliers quietly cut their own production deals in East Germany. Others are coming East on the coattails of Volkswagen's competitors.'' Standouts in Wellman's view are Germany's $4.7 billion Continental (ADR OTC, $17.50) and $2 billion FAG Kugelfischer (465 marks, $277); France's $3 billion Valeo (670 francs, $119); and Italy's $3 billion Magneti Marelli (1,950 lire, $1.60).

HIGH ON HYDRO Many analysts worry that the Revolution of 1989 will hopelessly delay the economic consolidation of Western Europe. Not Guy Rigden, Eurostrategist at UBS Phillips & Drew, the Union Bank of Switzerland's London-based investment bank. Trade barriers will continue to fall, he says, as more Europeans recognize how deregulation's bitter pill is stimulating the region's sweet gains in investment, employment and consumer spending. ''One of the surest ways to play this boom is via utilities,'' says Rigden. ''New demand and regulatory reforms should greatly reward the most efficient producers.'' High on his buy list are three electric companies whose capacity is concentrated in low-cost hydropower: Spain's Iberduero (618 pesetas, $5.83), yielding 7.4%; Germany's Viag (405 marks, $241), yielding 3.1%; and Austria's Verbund (615 schillings, $52), yielding 2.4%.