Each week, a professional investor tells MoneyWeek where he'd put his money now. This week:Stephen Macklow-Smith, portfolio manager, JPMorgan European Investment Trust.
Investors have embraced Europe again this year. However, with concerns growing about the market's ability to keep rising, many investors are now trying to be more selective about the eurozone economies and stock market sectors they invest in.
For dividend-focused investors taking a slightly more defensive stance, what are the most compelling options?
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There are a number of themes investors should take into account. One is the strengthening of banks and financial companies in the euro area. We expect dividends in this sector to grow substantially.
Historically, banks were strong dividend payers. As they start to generate cash once again, dividend payouts are likely to resume. This process is likely to accelerate as we near the end of the European Central Bank's (ECB) comprehensive assessment of the banking sector.
This stress test' was designed to examine the quality of bank lending and to ensure that banks had enough capital to survive a serious economic downturn. Banks have been raising capital steadily for the past 12 months. For example, we have seen successful rights issues from both Portuguese and Italian banks in 2014.
The ECB's ultimate aim is to revitalise lending. The stress test has constrained the banks for the last 18 months. But we see the provision of credit recovering healthily as we move towards the year end.
The Swedish banks have not been part of this exercise as they are outside the euro area, and they have been excellent performers for us in the last year. They went through their own financial crisis in the early 1990s. The lessons learned back then have enabled Swedish banks to perform well during the more recent crisis.
We still see Swedish banks as providing an attractive income. SE Bank (Stockholm: SEBA), for instance, yields more than 4%, and analysts expect the bank to grow its earnings both this year and next.
Another theme for dividend investors is to pursue stocks exposed to domestic rather than international growth, where more attractive valuations can be found. Companies such as Azimut (Milan: AZM), an Italian asset manager, and Deutsche Post (Dax: DPW), the German postal service, are typical of this shift.
Azimut benefits from Italy's deeply entrenched savings culture. Italian households have low levels of consumer debt, preferring to salt their money away into Italian government bonds.
Italian bonds have done very well as the eurozone has emerged from the financial crisis, and Azimut continues to see strong growth in its investment funds. Earnings are expected to grow by more than 20% next year.
Deutsche Post was privatised in the 1990s and listed on the stockmarket in late 2000. It has made a series of acquisitions over the years, including logistics group DHL, and it is now profiting from the trend towards online shopping and home delivery.
Analysts have become steadily more confident about the company's profitability over the last two years. In the next 12 months, Deutsche's profits are expected to grow by a further 10%.
We expect the current low interest-rate regime in Europe to persist at least until the middle of next year. In this sort of low-yield environment, investors are likely to retain an appetite for higher dividends. We believe that income investing in Europe is here to stay.
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