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Despite a series of grim forecasts pointing toward a recession in the euro zone this year, the performance of financial markets suggests that many investors are betting otherwise.

One such contrarian is Tom Becket, chief investment officer at Psigma Investment Management in the United Kingdom. From the end of last summer, when European Central Bank President Mario Draghi promised to do everything it took to hold the euro zone together, Becket has been steadily shifting his funds toward cyclical stocks and away from defensives, on expectations that a recovery isn't as far away as some people believe.

Draghi's speech, and the ECB's pledge to buy short-term debt from weaker euro-zone economies to help keep a lid on their funding costs, marked an "inflection point" in Europe's debt crisis, he says.

"Financially the euro zone seems to be in good shape, with the rehabilitation of peripheral economies coming much faster than anyone expected, and without Mr. Draghi having to touch any of the money in his magic pot," he says.

With the ECB backstop in place, more investors have been heading back to countries such as Spain and Italy, where few would have ventured at the height of last year's problems. Government-bond yields in those countries are down markedly from last summer, encouraging investors to venture back into the longer-term debt market in the past couple of weeks.

Becket cautioned that although stocks have come back strongly in recent weeks, the euro-zone economy is still struggling over all. But he believes that 2013 will end better than 2012. "Globally, there are some green shoots," he says, "with improvement likely to come midyear, so the second half could be good, boosting corporate investment and earnings. Europe will see some benefit from that."

For now, the best prospects are to be found in Europe's financial, materials, and industrial sectors, with a resurgence of mergers and acquisitions also a strong possibility. "Cash-rich U.S. companies are likely to take advantage of currently low valuations in Europe in order to buy growth," Becket says.

Some European companies could take the same route. Late last year, Germany's biggest engineering group, Siemens (ticker: SI), paid 2.2 billion euros ($2.8 billion) to buy the rail-automation business of British tech company Invensys (ISYS.U.K.) as part of a restructuring plan.

Becket's current favored picks are German industrial-gases company Linde (LIN.Germany) and Dutch electronics firm Philips Electronics (PHG), each for a different reason.

With a historic price/earnings ratio of 19 times and with a 2% yield, Linde doesn't look cheap, says Becket. However, he points out that with analysts forecasting 2014 earnings at €10 a share, its forward P/E comes down to 13, which he says is attractive given the company's growth prospects. He sees it as a well-managed company with a diversified global reach that gives it good exposure to improving economies both globally and in its European market.

"It's a higher-risk play, being a German industrial-gases supplier, but it should be tied into any global gross-domestic-product recovery, which we expect as 2013 progresses," he says. "Debt is sustainable at around €10 billion against a market cap of €24 billion."

Philips, a global business with activities ranging from health-care equipment to lighting, is a turnaround story. After a tough restructuring plan that saw it shed thousands of jobs and spin off its loss-making television business into a joint venture with Hong Kong-listed TPV Technology (903.Hong Kong), it is now an attractive but still undervalued stock.

Becket compares it to British consumer-goods company Unilever (ULVR.U.K.), which, under the stewardship of Chief Executive Paul Polman, has climbed from being a market laggard to a fully valued stock at over 17 times forward earnings. The company said this week that improving sales lifted full-year net profit by 5.4%, to €4.48 billion.

"Philips is at an earlier part of the restructuring process than Unilever," Becket says. "It still needs to cut staff and lower its cost base further."

Analysts say much hinges on the shape of Philips' fourth-quarter report, due on Tuesday. UBS analyst Fredric Stahl last week raised his stock recommendation to Buy from Neutral, increasing the price target to €24 from €19.50. "We think there is scope for Philips to surprise positively on margins in 2013," he says.

Rabobank analysts Hans Slob and Philip Scholte, who have a Buy rating on the stock and a €24.30 price target, say, "After three positive earnings surprises, we again dare to call an earnings beat for fourth-quarter 2012."

Philips shares were trading on Friday in New York at $29.66, while Linde closed in London at €136.65.