U.S. stocks have seen big rallies this year, and may be in need of a correction, but Europe is still in the early stages of its recovery. European financial institutions, which some investors are avoiding out of fear of another sovereign debt crisis, could be one of the best value buys going right now.  Citi’s European strategist Jonathan Stubbs is bullish on Europeans banks and other financial institutions, and thinks people should be combining them with a mix of quality assets in the near term.

European stocks expected to be cheap

Comparing the most expensive to the cheapest quintiles, European stocks in general should be cheap for the next 12 months. The money that has been flowing out of emerging markets and defensive assets like gold has largely gone into US stocks, leaving lots of value on the table in Europe. A full recovery is by no means guaranteed, especially in the U.K., but there are no clear road bumps in the short-term other than U.S. tension with Syria, which looks like it will end with a diplomatic resolution .

european stocks exp v cheap

European financials: a good deal

European financials in particular look like a good deal because they have been strongly correlated to U.S. 10-year Treasuries for at least the last decade, and now that Treasury yields are on the rise again it’s reasonable to expect European banks and financial institutions to follow suit. The ECB looks like it is willing to take strong action to prevent sovereign debt crisis from damaging financial institutions, even the problems with Greek debt that are coming round again look like they will be handled with less grandstanding (scheduling negotiations after the German election helps in this regard).

european financials v treasuries

Stock price and earning momentum comparison

Comparing just stock price and earnings momentum, financials are actually one of Europe’s standout sectors, along with autos and insurance. Looking at European stocks more holistically, Stubbs is overweight on banks and financial institutions, healthcare, insurance, media, personal and household goods, technology, and travel and leisure. He’s neutral on autos, food and beverage, and oil and gas, while he’s underweight on chemicals, construction, industrial G&S, retail, telecoms, and utilities.

“We continue to run barbell,” writes Stubbs, recommending a “mix of risk/value and quality/defensive growth, overweight financials.”

pe v momentum european 0913