BlackRock’s Koesterich: Europe’s Banks Are Its ‘Achilles’ Heel’

Russ Koesterich, chief investment strategist for BlackRock, told the advisor attendees at Commonwealth Financial Network’s Chairman’s Retreat on Monday that while he sees some investing opportunities in Europe, he also believes the European banking sector is the “Achilles’ heel of Europe.”

Speaking just after plans were announced for a European Central Bank bailout of Cyprus, Koesterich (left), who is also chief global investment strategist for iShares, drew a contrast between U.S. and European banks. While the U.S. financial sector has mostly delevered and the U.S. economy is “on a sounder footing than I expected,” he argued in a response to a question from Commonwealth chief investment officer and fellow CFA Brad McMillan that “Europe never fixed its banks.” That Achilles heel can be pricked if depositors start withdrawing from Greek, Italian and Spanish banks, he said.

However, Koesterich suggested that there were areas of Europe that provide opportunities for investors, notably in Norway and Sweden. And while valuations among U.S. companies have increased to the point that many are trading at a premium to their book value, especially smaller-cap stocks, the “valuation cushion” might be stronger internationally, especially in smaller developed countries like Singapore and Switzerland.

Returning to domestic matters, in answer to an advisor’s query on whether the markets are currently experiencing a “great rotation” back into equities, Koesterich was dubious. “It’s not happening,” he said, arguing that fund flows into equities are not coming from bonds, but rather that investors are moving out of cash accounts back into equities, using proceeds from sales of appreciated equities last year.