Time to Bank on Europe

11/12/2014 10:00 am EST


Richard Stavros

Analyst, Global Income Edge, Utility Forecaster and Personal Finance

The best way to bear-proof your domestic portfolio is to also invest in select European stocks; we believe European markets are now oversold and we're buying two cheap, high-yielding banks to take advantage of the situation, suggests Richard Stavros, editor of Income Without Borders.

We're not ignoring Europe's serious problems. The region suffers from slow growth and double-digit unemployment in some countries due to lingering effects of the financial crisis.

But an uptick in consumer spending—boosted by ECB stimulus and lower oil prices—could improve European company earnings and stock prices. And the strengthening of the US dollar will help Europe.

So, the opportunity exists to invest in the European market at cut-rate prices. Remember, this is a region that generates $16.5 trillion or 23% of global nominal GDP.

European banker Baron Rothschild of the Rothschild banking family coined the phrase in the 18th century that "The time to buy is when there's blood in the streets." And the time to buy seems to be upon us.

We're adding London-based global bank HSBC Holdings (HSBC) and Santander, Spain-based Banco Santander (SAN) to our aggressive portfolio. They have dividend yields of 4% and 7%, respectively.

They are among the strongest banks in Europe, which will benefit the most from new European Central Bank stimulus and improved consumer spending.
Both banks passed the European Central Bank's stress tests, which looked at whether banks could withstand various economic shocks.

Banco Santander, the Eurozone's largest bank by market value, had a core capital buffer of 10.34%. Lenders needed a buffer of above 8% of risk-weighted assets to pass the test, so Banco Santander is exceptionally strong.

Further, while these two banks do compete in many of the same markets in Europe, they are dominant complimentary emerging markets.

HSBC, which is the world's second largest bank with assets of $2.67 trillion, has its origins in Hong Kong and Shanghai and offers investors exposure to higher growth Asian markets.

Banco Santander has a deep presence throughout high growth markets in Latin America. Both banks offer good diversification between slower developed economy growth and higher emerging markets growth. That combination is a formula for high dividends, growth, and stability.

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