Magazine article The Spectator

Blue-Chip Opportunities despite Euro Turmoil

Magazine article The Spectator

Blue-Chip Opportunities despite Euro Turmoil

Article excerpt

Ian Cowie says some of the Continent's best companies are offering mouthwatering dividend yields these days

Pity the poor estate agents. Now there's a phrase you don't see very often. Barely had they begun to market Spanish villas and French gites as bargains because of the weak euro, than the pound began its precipitous decline.

Sterling-denominated investors may be tempted to keep their cash close to home until exchange-rate fluctuations become much less exciting. In the case of continental real estate, that would seem wise - especially when the Economist calculates that house prices in Spain remain 60 per cent higher than they should be relative to long-term average rental yields. For comparison, on the same basis, British housing appears only 25 per cent overpriced.

Unfortunately, just because things look bad now does not mean they could not be a good deal worse sometime soon. While the Greek debt drama has yet to bring the curtain down on the euro, money-market fears about a hung parliament have caused the sharpest falls in sterling for more than a year.

There might be worse to come if the general election really does produce an inconclusive result.

So, counter-intuitive though it may seem, this might not be a bad time to consider some diversification away from the pound. No, this is not going to turn into another emerging markets story. The time to buy into that was more than a year ago - as I pointed out at the time, here and elsewhere. By the end of 2009, the bull argument for the tiger economies had become so wearily familiar that their setbacks this year came as no surprise.

But continental Europe may offer overlooked opportunities today. Better still, this sector is so deeply unfashionable that large blue-chips offer mouthwatering yields. Yes, that's right. Continental Europe has discovered the joy of dividends. Formerly the preserve of Anglo-Saxon corporate culture, rising numbers of large European companies are making a practice of rewarding shareholders now, rather than relying solely on dreams of capital gains in future.

Take, for example, the Dow Jones Euro Stoxx 50 Index, which tracks blue-chips across the eurozone. Gareth Evans, an equity income strategist at Deutsche Bank, pointed out recently: 'Despite the strong rally in equities, 54 per cent of the market capitalisation of the Stoxx 50 is on a dividend yield of more than 4 per cent. In this period of record supply of fixed income, and with government credit quality weakening, one could argue that secure, high dividend yields are a decent risk-reward proposition against bonds.'

Deutsche tipped Telefonica of Spain, the French oil major Total and the German chemicals group BASF, along with more familiar giants of the eurozone such as Royal Dutch Shell, Vodafone and BP. Evans argued: 'The sustainability of dividends across the telecom, oil, utilities and pharmaceutical sectors is critical and in all cases we are confident that the threats are minimal. Large-cap yield has failed to participate in the rally because it is mostly regarded as a defensive strategy.'

After all the go-go excitement of 2009, investors who know that no market moves in a straight line forever might like the sound of defensive stocks paying high yields. But only the more hands-on individual investor is likely to wish to buy and sell individual shares on overseas stock exchanges, with all the hassle that can involve. …

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