European Zombie Banks ?
The LTRO success in calming the markets has, at least for now, vaned. While European banks benefitted from the easy carry trade in accumulating Sovereign Bonds they have also tied their destiny to their Governments debt.
The problem is that European banks are not lending enough to businesses to foster growth and have not taken the necessary recapitalization and restructuring. This has make many European banks dependent on the LTRO without a long term solution.
There will not be enough growth in Europe unless banks start lending again to business and not just to their home Governments.
Perhaps the ECBE intervention as a lender of last resort should have been stronger from the beginning and not channeled in the forms of loans to banks. Another weakness of European banks is their very limited growth prospectives for years to come. More downgrades are also possible as early of May.
The performance difference between the German and Spanish market since the beginning of the year highlight an even bigger gap between European countries.
Austerity measures do not usually leave much space for growth. In this case these heavy austerity measures will impact the creation of new businesses and, due to the high taxes, push several European companies to move their production or all their business elsewhere.
With low growth expected in Europe one good strategy is to invest in even boring, established consumer brands that will benefit from the emerging markets consumer middle class. I would therefore avoid European financials and difficult to understand business models for either strong consumer brands or even luxury brands.
This is well highlighted in the example of Swiss exports that had 7 out of 10 sectors falling in February but swiss watch, exports increase by 20% despite the strong franc. Even in Italy with all the difficulties of 2011, companies like Prada experienced an impressive 72% net income increase in 2011.
In Short: Strategy Play
a) Avoid European Financials but still opportunities in boring but stable European companies.
b) Include real asset in your portfolio not just Gold but commodities in general including agriculture, energy and industrial commodities through a broad commodity index/ETF.
c) Bet on the U.S. recovery by investing in U.S. companies with a strong brand and consumer appeal but avoid the Internet 2.0 Bubble.