By Thomas Buckingham, fund manager, JP Morgan Funds – Europe Strategic Dividend Fund
For income investors in European equities, selective stock picking is critical at the moment, as many of the most attractive stocks can be found outside of the traditional equity income sectors. Today’s environment requires investors to systematically look across the universe of European stocks to pick those with the best yield prospects, irrespective of sector.
In our view, investors are best served by avoiding the traditional ‘bond proxy’ sectors such as beverage companies and pharmaceuticals, which look overbought and hence have less attractive dividend levels at this point in time.
However, in other defensive sectors such as telecommunications and utilities, there are still attractive opportunities to be found in sustainably high yielding stocks. Cyclical sectors such as financials (insurance, real estate, banks) and media also contain some of the most interesting opportunities currently.
European automotive companies Daimler and Michelin are stocks that tick multiple boxes. Both are significant beneficiaries of weaker oil prices, which help to bring down the running costs on cars, making them more attractive to prospective buyers.
Both also have dollar linked revenues but a euro cost basis, helping them benefit from lower currency. They should also be beneficiaries of rebounding European consumer confidence helping auto sales.
Whilst concerns over Chinese demand caused some weakness in the shares, this has largely abated, and the European car market remains robust and continues to offer support. Additionally, Daimler’s product cycle and Michelin’s market leading position in the manufacture of energy efficient tyres leave them well positioned to continue taking market share on a global basis.
Another attractive income pick is Orange, the French telecoms company. The potential for further consolidation in the French market has been seen as a positive for incumbents given the potential favourable impact on pricing.