Buying Europe at the expense of America has been a widow maker trade since the depths of the Great Recession, but factors finally appear to be falling into place for a preference shift away from the U.S. and toward the Eurozone.
Given the relative regional outlook, buying euro area banks/financials at the expense of U.S. banks/financials should be a winning pair trade.
Nevertheless, we would rather err on the side of caution and boost euro area financials to overweight in global equity portfolios.
The euro area is lifting out of the economic doldrums. The ECB’s easy money policies have finally coaxed the economy close to a self-sustaining recovery. The latest manufacturing PMI data were very strong, signaling that real GDP growth should accelerate. In addition to easy monetary policy, fiscal policy has also contributed to GDP growth. Keep in mind that in calendar 2016, the euro area’s real GDP grew faster than the U.S. A healthy economic backdrop typically spurs loan demand, which is positive for bank profitability (see chart).
Moreover, inflation is at the ECB’s target. Headline CPI has accelerated…