Norris, who said the UK’s Barclays was also guilty of this, has taken his banks weighting from 0% in March to 22% at the end of September.
Citywire A-rated Norris had held nothing in banks for close to five years but has now selected six banks for his funds that he believes are best placed to take advantage of an improving economic backdrop in Europe.
Norris has gone overweight banks in his Dublin-listed fund through the addition of Swiss UBS, Danish Jyskebank, Belgian KBC and Italian Intesa, while he has added UK banks RBS and Lloyds to his UK Oeic.
Shunning French and Spanish banks
But he continues to shun French and Spanish banks on the view that French banks retain massive balance sheets and maintain 'loads of non-loan assets in which they have no competitive advantage'.
'BNP's balance sheet is a massive €2 trillion – the same size as the French economy - and if you look at their accounts they class most of these assets as 'other'. The investor has little visibility on what exactly these assets are and what risks they entail.'
Spanish banks, such as Santander and BBVA, have been kept alive by their Latin American operations but any improvement in Spain may be offset by things getting worse in Brazil and Mexico.
Norris has bought the banks after recycling out of what he considers to now be expensively valued blue chip international stocks such as Nestle and AB InBev.
He told Citywire Global: ‘Our issues with the banks were always that until the balance sheets were repaired debt holders would always get a better deal than equity holders but finally they are getting fixed.'
‘Banks have been locked in an earnings downgrade and most European banks have continued to get downgrades because they are a geared play on domestic European growth and only in Q2 of this year did Europe emerge from 18 months of recession.’
Norris is optimistic that there is some momentum behind the upturn which he thinks points to sustainable growth for much of the continent.
‘If you believe that the European economy is picking up you don’t now go for international blue chip companies but for those companies geared into the domestic recovery. We don’t expect international blue chips to surprise on the upside but we do think domestic cyclicals will.
Consumer stocks too expensive
Norris thinks stocks such as Nestlé, SAB Miller, LVMH and Remy Contreau are all trading on expensive multiples and have a significant chance of seeing further downgrades against the backdrop of slowing demand from emerging markets in particular.
‘Because of that, we think buying cheap domestic cyclicals with the chance of an earnings upgrade seems sensible.'
A year ago consumer staples would have been the biggest overweight at around 22% of the fund but the sector now comprises just 6%.
Norris says Europe has just three sectors of domestic cyclicals; banks, utilities and telcos but it is only the first that he is buying.
Norris thinks utilities may still be exposed to further downgrades as power prices continue to fall, and he thinks many fixed-line traditional telco firms are under threat from new tech developments with many investors ‘underestimating how wi-fi will cannibalise telco earnings’.
‘If European growth went from 0% to 2% we would expect to see much more growth from banks than telcos or utilities.’
Norris has picked his banks carefully as he believes many still face potential downgrades.
‘We have picked banks that have raised capital ratios sufficiently, can bounce back as European growth picks up and which have a credible capital allocation strategy.
‘In 2008 they owned all sorts of rubbish which is systematic of poor capital allocation and in most cases banks have been better off by shrinking their balance sheets to improve return on equity.
‘In Europe there are some management teams that get that and some that don’t.’
Norris cites UBS as one of the better ones, having halved its balance sheet from 2.4 trillion CHF to 1.2 trillion CHF after closing its fixed income investment bank.
‘They realised it was hugely capital intensive low margin and high risk and what they are now left with is of much higher quality.’
‘Contrast that with Barclays and the French banks that don’t seem to realise that the world has changed. Barclays has already had to raise equity.’
Over five years to the end of September the fund has returned 52.9% compared to 24.5% by the FTSE World Europe ex UK index.