Europe is enticing, Japan is so-so, and emerging markets are unappealing. By Nellie S. Huang, Senior Associate Editor From Kiplinger's Personal Finance, January 2014 David Herro co-manages Oakmark’s International and International Small Cap mutual funds.See Also: 24 Stock Picks for 2014 Europe did well in 2013. What will happen in 2014? The past year was a relief rally—Europe didn’t fall apart. In 2014, the rally will move to “Europe may start to grow.” The region is on the road to economic recovery. And the stocks are relative bargains. Europe has a lot of strong, world-class companies—they’re growing and making money, but the stocks haven’t recovered as much as U.S. shares have since the markets hit bottom in 2009. Sponsored Content Any particular bright spots? Advertisement We like European banks and firms that sell essential consumer products and luxury goods. Credit Suisse (symbol CS) is a combination asset-management firm and investment bank. It’s a good-quality business with a stable income stream. Daimler (DDAIF) is a leading truck company and the maker of Mercedes-Benz autos. Mercedes has generated record sales for the past two years, despite weak demand for cars in Europe. Daimler has a strong balance sheet and a dividend yield of 4%. One of our favorite businesses is Diageo (DEO,), the U.K.-based spirits business. We’ve owned the stock for more than ten years. It’s a solid business with iconic brands, such as Johnnie Walker. And it spends money in smart ways, from buying other strong beverage brands to raising dividends to buying back stock. What about Japan? The market is up 80% from its bottom in mid 2012 (in local-currency terms). The rally will continue if the prime minister follows through on his plan for economic and corporate reform. If that doesn’t happen, we’ll need continued earnings growth from Japanese companies and a weaker yen to boost exports. I expect subdued earnings growth in 2014 unless the yen weakens further. We’ve trimmed some holdings purely because of prices going up, but we’re always looking for opportunities. When the market dips, we have added to some of our holdings, including Daiwa Securities (DSEEY), Canon (CAJ) and Olympus (OCPNY). Emerging markets were basically flat in 2013. Will they come back? Advertisement Perhaps emerging markets have bottomed, but earnings growth has yet to pick up. And the stocks are still expensive compared with those in the U.S. and Europe. Earnings would have to grow, or prices would have to drop 10% to 15%, to change our view. Many of these countries have economic issues, Brazil and India in particular.