Forlines: Ride Euro Banks On EFUN

December 06, 2013

The eurozone debt crisis is in the rearview mirror, John Forlines says.

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today’s article features John Forlines, chairman and chief investment officer of Long Island, N.Y.-based JAForlines Global.

Since 2009, European bank stocks have been among the world’s most hated assets. Enough already.

While U.S. bank stock indexes have largely recovered from the Great Recession, euro banks remain priced for depression. When sentiment on an asset becomes deeply negative, big opportunities—remember U.S. corporate bonds in 2009-2010—may arise.

That’s why right now we favor owning European financial stocks through EUFN, the iShares MSCI Europe Financials ETF (EUFN | B-86). The fund targets European financial firms, 95 percent of the fund is allocated to banks, insurers and diversified financial firms, by far the most targeted exposure among ETFs.

So let’s examine why owning EUFN might make sense.

Plunge Into Crisis

The European banking crisis developed well after the U.S. had moved to bolster its banks.

Credit spreads in the European Union started to blow out in 2010—the Italian 10-year sovereign bond yield rose from 3.71 percent in October 2010 to 7.48 percent in November 2011. In Greece, 10-year sovereign bond yields rose as high as 44 percent in March 2012 before the Greek debt restructuring.

The crisis was so dire that the consensus in many financial circles was that a Greek exit from the eurozone was imminent, and that it could trigger the collapse of the entire eurozone or a fragmentation of much of it.

Studying investor psyche is valuable in assessing risks and opportunities.

The “frightening” speed at which the European banking system reached crisis, and the severity of the potential consequences, has impacted how investors view Europe today and has biased investors away from European equities, especially those of European banks.

Lingering Doubts

Sentiment remains deeply negative on European banks since the crisis, despite the marked improvement in the European economy and banking system.

This improvement would not have occurred without European Central Bank President Mario Draghi’s promise on July 26, 2012 to do “whatever it takes to preserve the euro.”

The fact that it was essentially a bluff may have played a role in the ongoing negative sentiment toward European financials. After all, the ECB still lacks many of the policy tools possessed by other central banks, and some investors continue to believe a repeat of the crisis is a distinct possibility.

We view the situation differently.


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