Despite a better than 15 percent rally since bottoming out in late June, so far the iShares MSCI Emerging Markets Index (NYSE: EEM) is down by better than 5 percent compared to a 24.3 percent gain for the S&P 500.

China has signaled that it can now live with slower growth and there continues to be speculation as to when the US Federal Reserve will begin slowing its quantitative easing program, all of which is weighing on the emerging markets. Not only is there the risk that the spigot flowing cheap money will get turned off, areas of financial and economic weakness are becoming more apparent around the world.

Those factors and a host of others prompted the International Monetary Fund (IMF) to make fairly radical cuts in its global growth outlook last month, more than halving its projection for Mexican economic growth to 1.2 percent and slashing its outlook for Brazil and India to 2.5 percent and 3.8 percent, respectively.

Emerging markets weren’t the only region to feel the wrath of the IMF’s red pen. Compared to its July forecast, the agency cut its growth outlook for the US by 0.2 percent to 2.6 percent, thanks to lingering uncertainty over Fed policy and Washington’s inability to get much of anything done. Granted, that forecast came before the extended government shutdown last month, so 2.6 percent growth will likely prove too optimistic.

The one region the IMF didn’t mark down was Europe, though it did say that the Continent must bolster its currency with a unified budget and banking union. Despite that criticism, the IMF continues to project euro zone gross domestic product (GDP) growth of 1 percent in 2014.

A survey of global business executives conducted by the consultancy McKinsey & Company also revealed that European executives are the most bullish in their peer group.

When polled in June, only 49 percent of European respondents expected business conditions to improve over the next six months. When asked again in September, 63 percent said they expected things to improve in the coming months. Fifty-nine percent of respondents also said current global economic conditions had improved in recent months, up from just 34 percent a quarter ago. About half of respondents also expected positive euro zone growth in the third quarter of this year, with 68 percent expecting fourth quarter growth.

As most experts agree, expectations are everything. That’s the reason that consumer and business confidence is so closely tracked and why those reports can be market-moving events. If those key groups are sanguine about their future prospects, odds are they will spend and invest, helping to drive the growth they are expecting.

That’s a major positive for Europe, which has suffered through more than three years of uncertainty. It’s also helped drive up European equities so far in 2013, with the Vanguard FTSE Europe ETF (NYSE: VGK) up by 16.2 percent year-to-date. But there’s likely still more upside to come.

For one thing, while European and US equities are largely at parity in terms of valuation with a price-to-earnings ratio of 14 times this year’s earnings estimates, European corporate profits are still nearly 30 percent off their pre-crisis high. Yields on European equities are also generally still more favorable than their US peers, yet another attractive quality.

Granted, there are still risks at play in Europe. While the odds of a breakup have dropped to almost nil, high debt-to-GDP ratios across the region remain a concern. It also appears that many European banks are likely undercapitalized, so it is fortunate that an accord on the Basel III framework was reached and its implementation pushed off until 2018.

Best European Bets

Over the past several months, I’ve written about several European companies that I favor and even added Unilever NV (NYSE: UN) to the Long-Term Portfolio back in July.

Unilever’s performance has been lackluster since its addition; it’s essentially flat over the past three months. However, thanks to waning interest in consumer staple names, others that I’ve covered have performed better.

Spanish health care company Grifols (NSDQ: GRFS) has returned 3.7 percent over the same period, while Luxottica (NYSE: LUX), an Italian eyewear manufacturer and retailer, is up by 2.9 percent.

While I remain positive on all of those names, my best performing so far has been the German-based IT company SAP (NYSE: SAP). A more direct play on resurgent business confidence than consumer sentiment, it is up an even better 7.9 percent since I profiled it in September.

With the European economy still in a rather nascent recovery, for now some of the best plays will be those like SAP that leverage business recovery. Business spending and investment typically lead any economic recovery, as companies begin replacing capital equipment and upgrading technology after delaying purchases for economic reasons.

According to data from Thomson Reuters, European business capital expenditures (capex) through June of this year totaled more than all of 2012. Analysts currently estimate that capex in 2014 will likely post at least 25 percent more growth. That view is driven by the fact that corporate cash balances in the region have been steadily falling over the past twelve months, the first such decline in nearly a decade.

That’s a positive sign for portfolio recommendation ABB (NYSE: ABB), the Swiss maker of power grid and industrial automation equipment. Wall Street estimates for this year’s earnings growth have been steadily increasing over the past three months, rising from $1.47 in August to $1.52 per share today. Estimates for next year’s earnings have actually been falling, though, largely due to questions as to whether Europe can sustain its current recovery.

After averaging better than 19 percent year-over-year revenue growth prior to the recession, sales were up just 3.5 percent in 2012 while earnings per share (EPS) fell by 14.5 percent.

Revenues have been posting steady growth so far in 2013, though, up from $9.7 billion in the first quarter to $10.5 billion in the third. If past seasonal patterns hold true, I expect fourth quarter revenue will likely come in somewhere around $11.3 billion, as client companies lock in their orders for the next year.

ABB’s industrial automation solutions should remain in high demand, as European businesses continue to push for increased efficiency to maximize profits during the recovery, a trend we have seen play out in the US.

At the same time, the European electrical infrastructure is in a state of decay similar to that in the US. Spending has been stymied as national governments focused on more immediate fiscal necessities. But the European Electricity Grid Initiative estimates that almost $1 billion will be spent over the next few years in research and development, with the aim of improving the grid’s efficiency.

The European Commission also estimates that nearly EUR1 trillion will be invested in power improvement and grid projects over the next decade. The goal of those projects is to create an integrated European energy market rather than several smaller regional markets operating on the Continent.

Given that ABB is the leader in grid technologies, it will play a leading role in helping the EU rollout that improved grid. At the same time, its dominance of the regional market in Europe essentially precludes foreign competitors from winning any sizable portions of that work, particularly as its customers will prefer the reliability of an established European partner.

Another major beneficiary of improved European business confidence will be portfolio pick InterContinental Hotels Group (NYSE: IHG).

Based in the United Kingdom with properties located worldwide, the company boasts Europe as one of its core markets. While occupancy, average daily room rates and revenue per available room (revPAR) have been posting solid growth in most markets, Europe has been a weak link in that global chain, as average rates declined 1.5 percent in the third quarter and revPAR grew by just 1.5 percent. That compares to 2.7 percent and 7.4 percent growth in revPAR in the Americas and China, respectively.

Those weak European metrics should soon begin to improve though, with the Global Business Travel Association forecasting that business travel spending—a key market for any hotel—should improve by 3.4 percent next year in Western Europe after a 1.6 percent improvement this year. That comes on the heels of more than 5 percent annual contraction over the past three years and will mark the biggest increase in travel spending in more than six years.

That bodes well for InterContinental, which managed to increase global RevPAR by 3.3 percent in the third quarter. Given that relatively solid performance and the improvement expected in 2014, the chain should increase its RevPAR by 6.5 percent or better next year.

EPS should come in at $1.65 this year and is likely to beat the $1.74 forecast for next year, as analysts have been slow to assimilate the stronger business travel outlook into their forecasts.

ABB and InterContinental Hotels Group both rate buys up to 30 and 35, respectively. Unilever also remains a buy up to 46, thanks to its strong brands and deep market penetration.