Looking back at the worst of 2011, investors from around the world feared that the debt crisis would turn into a full-fledged financial crisis. Financial services, characterised by banks, were the ones seen as being most at risk should a financial crisis materialise. These fears sent the stocks of banks plummeting, with the MSCI European Financials plummeting by as much as -45.1% from its 2011 peak (in local currency terms). Fortunately, recent policy actions are beginning to take effect and European banks are still alive and kicking (with some even rebounding strongly). In this week's Idea of the Week, we give 3 simple but compelling reasons why this sector could be interesting to investors. crucial supportive policy from central banks The supportive stance taken by the European Central Bank (ECB) has reduced the dangers of a complete lock up of the credit market. With actions such as the cutting of interest rates to a historic low of 1.0%, continuation of the Securities Market Program and the Longer Term Refinancing Operation (LTRO), the ECB cannot be accused of not coming to the aid of the Eurozone. With over EUR489 billion of loans taken by 532 banks in Europe, a credit crunch and liquidity crisis has been averted by the ECB. eurozone crisis stabilising In 2H 2011, it seemed as if the Eurozone could breakdown at any time despite the repeated calls of unity and solidarity by Chancellor Angela Merkel of Germany and President Nicolas Sarkozy. With yields of the sovereign debt of Italy and Spain (2 largest members of the PIIGS countries) rising above an unsustainable 7%, investors began to fret about the probability of an Italian or Spanish default, which could have proven to be the downfall of the Eurozone. Political change in both Italy and Spain brought tough austerity measures into place in an attempt to placate markets and prevent yields from soaring further while the ECB continued its Securities Market Program in an effort to contain rising yields. Markets are now relatively benign over Italy and Spain with yields on their national debt falling to more acceptable levels. valuations are attractive PB Ratio of World and European Financials Source: Bloomberg, Fundsupermart compilation in local currency terms Plenty of negativity and worries surrounded the financial sector in 2011 and it was not surprising that valuations for European financials were extremely depressed, or as we call it, at "Garage Sale" valuations. As of 16 February 2012, the European financial sector trades at a price-to-book (PB) ratio of just 0.74X, a discount of 23% as compared against the 2008-to-date average of 0.96X, which itself is rather undervalued. The lowest PB ratio shown in the chart is 0.48X on 9 March 2009. Conclusion While nobody knows with certainty which direction the European sovereign debt crisis is going to head to next, supportive policy by central banks, a stabilisation of the crisis and cheap valuations makes the European financial sector an interesting opportunity for investors who can stomach short- to medium-term volatility. For unit trusts exposed to European financials, we have the TA European Equity Fund which we estimate to be around 15% invested in the European financial sector as of end-January 2012, while investors who favour a more global approach can check out the OSK-UOB Global Capital Fund. Related Articles: A Bond-Beating Formula: Earnings Growth + Dividends + Valuation Expansion TA European Equity Fund OSK-UOB Global Capital Fund

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