9 februari 2012
Undervalued cyclicals offer most attractive opportunities for European High Dividend investors in 2012

With value laggard over the past five years, ING Investment Management (ING IM) believes that this year will see cyclicals come into their own along with good quality Eurozone Financial, Utility and IT stocks. Nicolas Simar, Head of Equity Value Boutique, ING Investment Management says: “It has been two tough years for valuations and, looking over a five year period, we are looking at value underperforming growth by 23%. However, we think it is time to reconsider cyclical stocks – many are running at depressed valuations that fully discount a normal recession scenario while still having sound balance sheets.” In global terms, the asset manager expects the global economy to grow by 3% in the coming year - well below its long-term potential, with around 2% coming from Emerging Markets.

However, in terms of finding value in European stocks, ING IM highlights both the potential of high quality financials in the Eurozone and improving dividend outlook for Utilities and the IT sectors. Nicolas Simar continues: “Liquidity matters and the large, if silent , expansion of the ECB balance sheet gives us a more positive outlook not only on bank funding but also capital and valuation. Furthermore, for other high quality stocks, utilities' dividend outlook has improved due to capex cuts. The power prices in 2011 were the lowest achieved meaning that the earnings momentum is bottoming for the sector.

Also if we look at gas, the declining Japanese nuclear availability is improving the forecast for European Gas. “Information Technology (IT) also offers opportunities in terms of valuations and generally strong balance sheets for stocks such as Cap Gemini.” On the other side, ING IM maintains a negative stance on consumer goods - due to its valuation and strong relative performance – and energy, again due to valuation, strong relative performance and also negative earnings revisions. Nicolas Simar concludes: “We have reduced our Energy exposure after strong performance of integrated names, removing names such as Royal Dutch.

For Consumer Goods, we maintain our underweight bias in our Euro High Dividend Fund, moving away from late cyclical players (Reed Elsevier) towards more early cyclical names such as Accor, Daimler and ProSieben.”