9th March 2015
With European investors facing the dilemma of low economic growth, low inflation rates and central bank intervention, Alice Gaskell, co-manager of the BlackRock Continental European Income Fund, discusses where they are currently finding investment opportunities…
Nominal growth in Europe is likely to be subdued for the foreseeable future given the slow progress of structural reforms, slowing growth in Emerging Markets, the continued need to de-lever and low inflation rates.
European interest rates are unlikely to rise on a sustained basis for the foreseeable future. However, there is a realistic chance that the US Federal Reserve will increase benchmark rates this year which is likely to lead to a further depreciation of the Euro versus the US Dollar. The latter coupled with the tailwind from lower oil prices are clear positives going forward.
Income sectors that look increasingly interesting to us today are the Telecoms, Utilities and Insurance sectors.
Within the Insurance sector, several companies have excess capital which will allow them to continue to return capital over and above their ordinary dividends and / or increase the pay-out ratio of the ordinary dividend. Axa recently posted solid results and increased its payout ratio.
After a period of restructuring, the Utilities sector currently offers attractive free-cash-flow yields backing above-average dividend yields. We expect some stocks with undervalued international infrastructure-related assets to start to contribute to growth of group profits in the medium-term.
European mid-cap stocks can be highly attractive area for Income investors. The market often fails to estimate dividends correctly in this particular area, and therefore the non-megacap space can be a good way for us to make money for our investors.
The German residential housing sector is also attractive but needs to be carefully considered given recent outperformance from exposed stocks. In general, Real Estate offers highly predictable cash-flows backing strong dividend yields significantly above the risk-free rates. In addition, the German residential property market offers the potential for significant capital appreciation as historically low ownership levels are gradually increasing on the back of low interest rates and rising real wages.
The recovery of the peripheral economies continues while there is genuine political change happening in Italy – all of this means that dividend yields are increasingly safe and that dividend growth should accelerate.