Europe’s current ‘consensus’ trade could prove to be short lived, asset managers predict

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Photo: Frankfurt, Germany’s Financial District

General positivity about Europe’s financial sector is not expected to last long, according to two asset managers, who have warned that banks might not be the best investment option over a longer period.

“I can put my equity money into better companies where I get a better return, so I am quite happy to leave the banks … It’s a consensus trade and certainly in Europe if they were fixed we wouldn’t have negative interest rates, we wouldn’t have the dovish ECB (European Central Bank) that we have,” Neil Dwane, chief investment officer equity Europe at Allianz Global Investors, said in an interview on American network CNBC on Monday.

There are three main factors affecting the attractiveness of European banks, according to analysts: They are late in the cycle compared to US banks, they have yet to deal with legacy issues from the crisis, and the ECB is still in a state of accommodative policy, which limits banks’ returns.

“European financials are still not solved and they are five years behind the US rather than six months and therefore the ability to return capital to shareholders is actually zero across most of the European banks,” Dwane added.

There are some tailwinds out there for European banks, such as European consumer which is benefiting from improved economic growth. But there are still doubts as to whether the shares of European banks will be able to offer decent returns in the longer term.

“I would question the ability of the consumer to re-leverage significantly further than we are,” Dwane said.

Meanwhile, Michel Perera, the chief investment officer at Canaccord Genuity Wealth Management, agreed that European banks are a trade that can only really offer some short-term interest.

“It’s a trade, it’s not a long term investment but it’s a trade that actually has the wind in its sails right now, because of the massive improvements in the consumer. And I am not quite sure that this is fully reflected in the way that a lot of stock prices are in there,” he said.