Europe has a lot going on right now, and none of it is particularly good. The situation in Ukraine and Russia is leading the West to impose economic sanctions and trade restrictions, and an actual ground war threatens to erupt in Ukraine. Portugal bailed out Banco Espirito Sancto to the tune of $6.6 billion as a result of the founder’s bad behavior. Deflation remains a very real concern in Europe, and the economy is struggling to improve.
European bank stocks continue falling as a result of all the bad news.
The funny thing is that while the rest of the world is watching, not too many European investors and traders are at their desks to react to all the news. I have always said European markets should close in August because everyone goes on vacation. If conditions do not change before European investors and traders return after Labor Day, we could see some real fireworks in the European equity markets.
I know lots of investors will want to go bottom-fishing in Europe, but I must warn that you must be very selective. Given the conditions in the eurozone economy, many of the stocks that might appear to be bargains have horrible fundamentals. If the situation in Ukraine disintegrates further, these stocks could lead the way lower. Even if we see improvements in the eurozone, issues with poor fundamentals will lag behind a market advance.
The big European banks are facing some enormous headwinds right now. The U.S. Justice Department is investigating many of them, and some have already paid huge fines as a result of violating U.S. trade regulations. The European Central Bank is stress-testing the regions’ banks, and many have to sell off assets in attempts to de-risk and de-lever their balance sheets. Many European banks are going to have to raise capital via equity offerings in order to rebuild their balance sheets before ECB finalizes the stress tests in October.
Portfolio Grader illustrates why investors really need to avoid the European financial sector. Due to the deteriorating situation, Portfolio Grader has downgraded European bank stocks over the past few months. Deutsche Bank (DB), UBS AG (UBS) and Credit Suisse Group AG (CS) are all rated “F” right now and are “strong sells.” Barclays (BCS), HSBC Holdings (HSBC) and National Bank of Greece (NBG) all carry “D” ratings and are “sells” at their current prices.
European investors and traders may take August off, but Portfolio Grader doesn’t. The situation for European bank stocks is bad and getting worse, and investors should avoid the urge to bottom-fish until those banks’ fundamentals improve.