ING IM: European dividend stocks offer buying opportunity in 2015
Quantitative easing (QE) and accelerating global growth should support corporate margins and dividends, argues Nicolas Simar, head of the Equity Value Boutique at ING IM.
European dividend stocks, especially those in cyclical sectors, offer investors a unique buying opportunity in 2015.
Prices of European equities have yet to fully reflect the ECB’s QE and corporate margins should improve this year due to accelerating global economic growth, which should generate higher dividends. European earnings are still 30% below their previous peak in 2007 while US earnings are 20% above theirs: this gap will close as the ECB remains accommodative and the declining Euro boosts exports and adds to top-line growth.
Another gap set to close is that between the real yields of European equities (3.3%) and German Bunds (0.39%), which is around 90% of the peak seen in September 2008. ING IM believes there are still opportunities to exploit this gap before it narrows.
Selected Cyclical stocks are particularly attractive after their poor performance in 2014 depressed market expectations to the point that some of them are now priced for a recession.
Cyclical sector dividend yields relative to defensives are at a decade high. Evidence from the US, UK and even Japan shows that QE leads to cyclicals outperforming. Earnings are already improving – they led the earnings recovery in Q3 2014.
The value style approach has suffered over the last six months as a result of weak global economic growth, falling commodity prices and geopolitical tensions encouraging investors to rotate away from higher risk stocks such as energy and materials, and from small caps into quality growth sectors such as consumer staples and healthcare.
But the current market environment offers a unique buying opportunity. Price momentum and defensives’ leadership have reached extreme valuation levels such that selected cyclical companies will be able to gain momentum and initiate growth in 2015, especially those in the banking and materials.