Emerging markets underpin 2012 European equity power picks, says S&P

Access to emerging markets will be a common feature of European equities that manage to succeed amid the turbulence likely to be seen in 2012, according to research by Standard & Poor’s (S&P).

S&P Capital IQ’s European equity research team has identified ten stocks spread across a range of sectors that it expects to outperform over the coming 12 months. Exposure to the growth seen in emerging markets is a running theme.

BMW is the first ‘power pick’ identified by the team, as the German automaker’s presence in the Chinese market and a range of new products are expected to drive strong profit growth over the course of next year. The stock is a top holding of Ian McVeigh’s £681m Jupiter UK Growth fund*.

Prudential’s exposure to fast growing emerging markets such as Indonesia, India, Malaysia and Vietnam, combined with its reliable UK operations, should make it another attractive stock in 2012. Stuart Rhodes’ £1.6 billion M&G Global Dividend* and Thorsten Winkelmann’s £1.2 billion Allianz RCM Europe Equity Growth* are two funds presently holding the company.

Energy services firm Petrofac, which is included in Tim Steer and Stephen Yiu’s £336.5m Artemis UK Growth fund*, is expected to shift more of its operations to emerging markets next year. S&P Capital IQ says this could lead to higher earnings per share.

Food producer Danone has a strong presence in Northern Europe and North America but still manages to derive more than half of its revenues from emerging markets. Owned by Vincent Devlin’s £356.2m BlackRock Continental European fund**, the company has a strong position in the high-quality foods sector.

Exposure to the fast-rising Chinese and Asian luxury goods market is creating attractive growth potential for LVMH, the research claims, adding to its strong balance sheet and robust cash generation. Nick Davis currently holds the French conglomerate in his £527.3m Threadneedle European fund*.

Norwegian mobile operator Telenor, owned in Martin Skanberg’s £247.5m Schroder European fund*, has a good chance of enhanced profit margins and increased shareholder remuneration in 2012 due to its strong position in the domestic market and exposure to Asia, says S&P Capital IQ.

Healthcare firm Coloplast is tipped to show good profit expansion in the next 12 months, thanks to its “a well-executed production relocation, optimisation and cost control”. The company managed to grow its emerging market exposure by 11% in 2011.

SCA has upheld its position as the leading hygiene and paper company because of its defensive sales profile and effective cost reduction programme. The firm is expected to see margins peak next year on the back of lower costs, higher prices and new products.

Contract caterer Compass is forecast by the researchers to continue to benefit from the weak economic environment as the trend for outsourcing remains strong. Good earnings are expected in 2012 thanks to the firm’s asset-light, low capex, largely variable costs and highly cash generative business model.

Compass is a popular stock with asset managers, found in the portfolios of the £1.3 billion BlackRock UK Absolute Alpha**, the £850m JOHCM UK Opportunities* and the £164.7m L&G Growth* funds, among others.

Vodafone’s recent results have shown improving trends in its emerging market operations, especially in India and South Africa. “With an 8.2% dividend yield, well covered by cashflows, and an ongoing share buyback programme, Vodafone has an attractive valuation,” says S&P Capital IQ.

Neil Woodford owns Vodafone in his £10.8 billion Invesco Perpetual High Income* and £8.6 billion Invesco Perpetual Income* funds. It can also be found in Tom Dobell’s £7.2 billion M&G Recovery fund* and Adrian Frost’s £3.9 billion Artemis Income* fund.

*As at November 30 2011

**As at October 31 2011

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