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 bank shares still trade at reasonable valuations of 1.1 times price to tangible book value, which is still a discount to the market.
French, Spanish and Italian banks are the most geared to benefit from rate normalization in Europe. French equities are of particular interest, because their valuations fall well below the rest of Europe.
The French economy is key, and its improvement will boost the rest of Europe. It’s gradually grown again and could continue to grow by two percent this year–up from one percent in 2016.
French business-sentiment indexes have picked up and so has French consumer confidence. The latter is considerably important in France, because it’s the most closed (excluding intra-European trade) major economy in the world.
That said, France has one of the largest exposures to European domestic demand, second only to Greece. As this demand recovers, the French economy benefits.
Consumer confidence has been resilient, even as political uncertainty has risen. This suggests that household consumption should pick up further.