Banking on Europe

08/07/2017 2:50 am EST

Focus: GLOBAL

Yiannis Mostrous

Editor, The Capitalist Times

The big positive in Europe is that more countries have been growing faster than expected. Therefore, current economic strength can be sustained, although probably without much more acceleration, into next year, notes Yiannis Mostrous, global expert and editor of Capitalist Times.


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Mario Draghi, the head of the European Central Bank (ECB) and arguably the smartest of the developed economies central bankers, has played a key role in regaining the eurozone’s economic footing. His policies remain accommodative, although he’ll also eventually have to take a more restrictive stance.

Financial stocks are the best way to profit from the eurozone’s potential upside. European banks, in particular, are currently experiencing positive earnings and dividend momentum. This latter dynamic is the strongest it’s been in eight years.

The ECB should make its first rate hike sometime next year. This increase will be the final catalyst for better bank earnings and commence a new cycle of higher earnings expectations by the market.

European banks are currently experiencing positive earnings and dividend momentum. This latter dynamic is the strongest it’s been in eight years.

As noted above, the ECB could make its first-rate hike sometime next year. This increase, whenever it comes, will be viewed as a positive for the currency and bank stocks. Such a move will prove to be the final catalyst for better bank earnings and should commence a new cycle of higher earnings expectations by the market.

French, Spanish and Italian banks are the most geared to benefit from rate normalization in Europe. Consequently, investors should stay invested in European banks.

The trade, first formally stated here three months ago, has performed respectably: The iShares MSCI Europe Financials (EUFN) is up around 17 percent since the end of April. This translates to a 60 percent annualized total return rate.

Given the continued positive developments in the eurozone and the pace at which financial shares are moving compared to the rest of the market, we maintain our positive rating of iShares MSCI Europe Financials.

It remains the easiest way to gain exposure to European financials. Forty-six percent of the fund offers access to eurozone financials, and the rest are in the UK, Switzerland and the Scandinavian countries. iShares MSCI Europe Financials is a buy up to $24.

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