Falling interest rates, which he called value’s “kryptonite”, is no longer a headwind in Europe, according to Burnett.
“Rates can’t go any lower in Europe,” he stated, “and if value is going to work, you just need interest rates to stop falling, you don’t necessarily need them to rise.”
European financials are beginning to see the light at the end of the tunnel after dealing with the “incessant change in regulation” and the bulk of the post-crisis litigation, he said.
As the three “killer headwinds” subdued, the dividend growth European banks can provide should tempt investors looking to get on the value play.
The dividend yields of European banks are the second highest in the sector. Importantly, they are only paying out 45% of their earnings to support the dividend, which means they can lift the dividend even if they don’t grow earnings.
“Compare this to energy in Europe. These companies are using more like 100% of their earnings to support the dividend. It doesn’t mean these energy companies are a bad investment, it just shows you the ability of the banks to grow dividends in Europe is extremely high.”
And valuations for European banks in price/earnings terms remain at historically low levels.
Whereas for Swiss food and drink giant Nestle, the price/earnings to growth ratio has never been higher.
“History says for European equities, this is a once in a generation opportunity for value. Banks are the clear standout opportunity.
“Of course, it takes courage to exploit this trend,” he added. “The deepest value opportunities have got the highest dividends. On the other side, the perception is that staples are safe but they’re not as safe as they look.”
