EUFN iShares MSCI Europe Financials

By Victor Reklaitis, MarketWatch

Strategists: Sector switches 'from value trap to value trade'

You've probably heard that European banks aren't doing so well, from Italy's long-suffering lenders (http://www.marketwatch.com/story/why-italys-bank-crisis-could-be-ticking-time-bomb-2016-07-21) to Deutsche Bank (http://www.marketwatch.com/story/why-deutsche-bank-had-global-markets-swooning-this-week-2016-09-30) with its potential $14 billion penalty.

But there is so much gloom around the sector that European banks now look good to Citi's stock strategists.

These banks have gone "from value trap to value trade," and it's time to buy them, said Citi's Jonathan Stubbs, Ayush Tambi and Nikhil Jadhav in a note dated Wednesday.

The strategists have given a range of reasons for their bullishness in their 15-page missive, starting with the fact that contrarians ought to like banks in the European Monetary Union, meaning countries that use the euro.

"EMU banks are the worst performing region/sector of the 285 we track in the last 10 years," they wrote in their note, which offers the chart below. European banks are "the world's biggest contrarian trade."

Another reason to buy is because European banks are cheap on both absolute and relative terms, according to Citi. They gave the chart below showing price-to-book and relative price-to-book data.

The strategists acknowledged the sector's fundamentals are mixed, and they also don't see it attracting momentum traders.

"To move from value trap to value trade, risks need to reduce. We think that is happening," they said.

"To become a momentum trade beyond that requires fundamental improvements. That is less clear."

Read more:Deutsche Bank and 3 other ways Europe is giving investors heartburn (http://www.marketwatch.com/story/4-key-ways-europe-is-giving-investors-a-major-case-of-agita-2016-10-03)

And see:Here's why talk of an ECB taper hit a sore spot (http://www.marketwatch.com/story/heres-why-talk-of-an-ecb-taper-hit-a-sore-spot-with-investors-2016-10-05)

The iShares MSCI Europe Financials ETF (http://www.etf.com/EUFN)(EUFN) offers a way to bet broadly on continental banks, but Citi has named individual stocks to buy, including BBVA (BBVA) (BBVA) , Standard Chartered (STAN.LN) , Danske Bank (DANSKE.KO) , KBC (KBC.BT) , Intesa (ISP.MI) , BNP Paribas (BNP.FR) and ING (ING) .

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October 06, 2016 08:05 ET (12:05 GMT)

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