2 Calls for This Week's Market: Underweight European Banks, Overweight Global Energy

|
Includes: EUFN, IXC
by: Russ Koesterich, CFA

Call #1: Underweight European banks

As Europe continues to muddle along, much of the bad news has been discounted in with the exception of the banks, which are likely to continue to remain under pressure.

S&P cut Portugal’s rating two notches as its parliament rejected the government’s new austerity measures, prompting Prime Minister Jose Socrates to resign. Meanwhile Moody’s downgraded 30 small Spanish banks with mostly negative outlook following the earlier sovereign debt rating downgrade. However, despite the banking issues, Spain has been able to continue financing its debts.

In last week’s summit, officials agreed to increase the European Financial Stability Facility (EFSF) fund to 440B EUR by June. As long as Spain can continue to fund its government, the EFSF can finance a Portugal bailout. This is a major negative for European banks, which are the holders of sovereign debt and will ultimately need to raise more capital, diluting existing shareholders.

Call #2: Overweight global energy

Late last year we listed the energy sector as a likely leader in 2011. Year-to-date the U.S. energy sector is up 15%, while the global energy sector is up 13%. We believe that ongoing geopolitical risk will keep oil prices elevated. While energy stocks do not look as cheap as they were earlier in the year, they are still trading at or below market levels. Of the two (U.S. and global), we favor global energy companies as they are a bit cheaper.

Potential iShares solutions

Underweight European banks EUFN – iShares MSCI Europe Financials Sector Index Fund
Overweight global energy IXC – iShares S&P Global Energy Sector Index Fund
Click to enlarge

Source: Bloomberg