European bank stocks have turned positive for the year. Since the Global Financial Crisis(GFC) of 2008-09, the Greek sovereign debt crisis and the many other crises the continent’s banks were left for dead by many investors. Unlike US banks which have recovered strongly since the crisis, European banks have been slow to implement changes necessary. However after years of enduring misery European banks may be heading for a recovery.

From a recent article in the journal:

These banks may have found a savior in Donald Trump. Investors have bet that the U.S. president-elect will embark on an infrastructure-spending binge that will send ripples across the European economy—eventually prompting the region’s central banks to raise rates. Loosening regulations, another of Mr. Trump’s pledges, would also help European banks, investors say.

Rising interest rates make banks’ basic lending business more profitable. An increase in yields on longer-term debt in global markets has already boosted financial stocks. On Thursday, bond yields were higher across the board as debt prices fell.

More buoyant banks are key for the eurozone’s economy, where extremely weak lending to businesses has held back the recovery

Goldman Sachs upgraded European banks to overweight in their asset allocation for 2017, meaning they aim to hold a larger share of them than a benchmark portfolio would suggest.

Source: Back from the Brink: European Bank Shares, WSJ, Dec 15, 2016

The following chart shows the year-to-date return of the benchmark STOXX Europe 600 Banks Index:

Click to enlarge

Source: STOXX

The above index holds 45 large banks from Europe including the UK. The constituents are selected based on free-float market cap.The chart below shows how European banks have lagged the overall market in the past few years:

Source: STOXX

Currently the index has a trailing dividend yield of 4.1%.

From an investment perspective, though banks from Europe are showing signs of recovery investors may want to wait and see how they perform early next year. European banks still face many headwinds like the Brexit, political crisis in crisis, populist upheavals in other countries, etc.

Investors willing to add European banks can consider Scandinavian banks such as Swedbank AB (SWDBY), Svenska Handelsbanken AB (SVNLY) and Nordea Bank AB (NRBAY). ING Groep NV (ING) is a good pick among the other major banks. However US investors may want to buy it under $10 a share. The bank has recovered from around $9 a few months ago to over $14 now. British, French and German banks are best to avoid now.

Related articles on European banks you can checkout:

• It’s Time to Buy Cheap European Bank Stocks, Citigroup Says , Bloomberg, Oct 6, 2016
• Why investors are snapping up European banks after Trump victory, MarketWatch, Nov 10, 2016
• Are European Banking Stocks Cheap Enough to Buy?, Morningstar UK
• European Banks? Yes, European Banks., Investor Place

Disclosure: Long SWDBY and ING

U.S. small cap stocks have had a great run since the election ended. Investors have bid up prices of these stocks on the hope that many policy changes such as lower taxes will benefit them more than large companies.As a result, large cap stocks have lagged small caps so far this year. For example, while the S&P is up about 10% the small cap benchmark Russell 2000 is up about double that amount year-to-date.

But did small caps really outperform large caps over the long-term? 

According to an article by James MacGregor, Bruce Aronow at Alliance Bernstein blog, small caps have performed inline with large caps in the past five years as shown in the chart below. So they have not outperformed large-caps.

Click to enlarge

Source: Trump and Small-Caps: A Perfect Match?, Ab Blog

The key point to remember is that while in the short-term small caps beat large caps, over the long-term especially in the past five years they have simply followed the performance of large caps.So over excitement on small cap stocks is unnecessary.

• Related ETFs:
• SPDR S&P 500 ETF (SPY)
• iShares Russell 2000 ETF (IWM)
• Vanguard Russell 2000 ETF (VTWO)

Disclosure: No positions

European stocks look cheaper than U.S. stocks now based on P/E ratio and other factors. However U.S. stocks are better for better for growth than European stocks under Trump Presidency, according to Peter Fitzgerald of Aviva Investors quoted in a recent Citywire UK article. He also noted the one important reason on why investors’ perception that European equities are cheap is incorrect. From the article:

European equities aren’t as good a deal as investors believe, according to Peter Fitzgerald of Aviva Investors, who is looking to the US for growth following the election of Donald Trump.

Fitzgerald, global head of multi-asset at Aviva Investors, believes investors are failing to take into account the composition of indices when comparing US and European stocks. ‘There is the common belief that European equities are cheap but what is not taken into account is the composition of the index,’ he said.

‘You need to adjust the composition and factor in the S&P has 20% in technology [companies], which trade on higher multiples but Europe only has 2% in technology but more in financials and commodities. When you compare the adjusted market composition then you see [European equities] no longer look as cheap.’

European valuations have been pushed down by financials in particular, but despite European banks being inexpensive, Fitzgerald said he would rather back US banks which he regarded as more stable.

Source: Where on earth should you invest in the Trump era?, CityWire UK

Some of the sectors that are expected to grow strongly in the next few years are industrials, defense, transportation, infrastructure, healthcare and banking. Already many stocks in these sectors have shot up. Hence investors looking for growth-oriented companies can monitor these sectors and add stocks during pullbacks. Momentum should keep these stocks continue to vault higher in the coming year. A few companies that investors can consider are listed below:

Railroads: Kansas City Southern(KSU), Norfolk Southern Corp(NSC), CSX Corp (CSX), Canadian Pacific Railway Ltd(CP) and Union Pacific Corp (UNP)

Infrastructure, Defense: Caterpillar(CAT), United Technologies Corporation (UTX), The Boeing Company (BA), Martin Marietta Materials, Inc. (MLM)

Disclosure: Long CNI, CSX, UNP