A number of risks still remain on the European Continent but high yielding stocks, left behind by the recent bounce, will provide opportunities says Newton’s Tom Beevers.
The manager of the £18m Newton Pan-European fund says these potential risks, which could choke off a recovery, have been overlooked as optimism has grown.
“Unemployment is still rising, both in the US and Europe,” says Beevers.
“Housing markets are falling, affecting in particular the UK and Spanish markets.
“The solvency of the banks could return as an issue, despite the fact that huge amounts of capital has been raised, and rising expectations for earnings are creating the potential for disappointment later on in the year.”
He adds the public sector is also becoming a concern, especially in Italy which has a debt to GDP ratio of 100%.
In light of this, he has avoided exposure to either overleveraged countries or overleveraged consumers in his weightings.
However, Beevers says France, which has not had a severe housing bubble, stands out as an investment opportunity, particularly in high yielding stocks.
“The recent market rally has been undiscriminating, as cyclical stocks have rallied in unison. Many of these stocks are now factoring in a return to conditions prior to the credit crisis,” says Beever.
“Other stocks have been left behind, and some of them are now offering extremely attractive valuations including Vivendi (8.5% yield) and Deutsche Telekom (9.5% yield).
“As we enter into the second half we expect a more discerning market in Europe, and gains for many of these overlooked stocks.”
