European Financials review

Today is the turn of the European Financials. Are these companies in a good shape? Should we wait? We have seen an incredible run since 2009 and the main reason was the quantitative easing programs applied by the different central banks around the world. We can see that the Fed is tightening while the ECB and the BoJ keep running the easing programs. 

Eurostoxx

     FESX (Eurostoxx) continuous future, source: TradingView

As you can see the Eurostoxx has been raising since 2012 with the exception of 2015 and 2016. In this period we saw macro improvements in the European economy apart from the inflation data.

Eurostoxx banks 600

     FESB (Eurostoxx Banks 600) continuous future, source: TradingView

In contrast to the Eurostoxx, the banking index hasn´t shown a continuous growth. After the recovery from 2009, this index fell until 2012. We saw important highs in 2014 that couldn´t be broken in 2015. After that and due to the Chinese Black Monday, this index was falling until the middle of 2016. The last bull run was between 2016 and 2017. At the moment is testing a resistance around 127.00 that worked as a support in the previous year.

At this point, it is difficult to say if the movement will continue to the upside or will look for lows. The earnings picture so far has been mixed. HSBC, Europe’s biggest bank, reported profits matching expectations. On the other side, the French banks' earnings disappointed the market. Societe Generale and BNP Paribas traded lower on Friday due to their earnings report. The general concern in the sector is the rising costs. The monetary policy applied by the ECB doesn´t help the banks. Hopefully, the loan growth should pick up sooner or later.

EUFN iShares MSCI Europe Financial Sector Index

Let’s have a look at this interesting ETF. As a brief explanation, the iShares MSCI Europe Financials ETF seeks to track the investment results of an index composed of developed market European equities in the financial sector. The reason to invest in an exchange-traded fund is to avoid stock picking and taking advantage of tracking a sector in this case with a small cost. These are the portfolio characteristics:

       EUFN (iShares MSCI Europe Financials), source: iShares (Blackrock)

The P/E ratio is not the one that the value investors look for but it’s appealing if you compare with the current market levels. I would like a lower P/B ratio but it´s acceptable. One of the problems with the financial sector is that it´s cyclical, conservative and it’s not as profitable as it used to be. In the case of Europe is even harder to make money at the moment due to the ECB policy. Hopefully, adopting new technologies and AI will bring positive returns to this sector in the future but this is a long-term goal.

This is the current composition of this ETF:

      EUFN (iShares MSCI Europe Financials), source: iShares (Blackrock)

Diversification is one of the ETF advantages. As you can see, these are the top ten holdings on this fund. 

     EUFN (iShares MSCI Europe Financials), source: TradingView

The EUFN tried to rise to 2014 highs in the first weeks of 2018. Sadly this attempt failed and now is down 10% from the highs of the year. This product has been ranging between 14$ and 27$ in the last 8 years.

     EUFN (iShares MSCI Europe Financials), source: TradingView

This chart shows the EUFN prices for the last 3 years. After comparing the last two charts, I consider that buying below the 18 level is interesting for the long term with a take profit in 24. Obviously, you should be able to handle a 20% drawdown on this investment which is quite high for certain investors.

Sum up

I decided to introduce this ETF because I consider that it is an interesting instrument where you can diversify your portfolio for a reasonable price. In my opinion, I consider this ETF suitable for medium-term or long-term investment. This sector has good fundamentals. Some of the main risks are the correlation with other markets, these companies operate globally so they can be affected by shocks around the world, they are adapting new technologies to their operations and the central banks' policy affects them directly.

Have a good trading!!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved