Flee from consensus investing in 2012, says Franklin Templeton’s Zoellner

Now is not the time for European investors to follow the herd and seek out defensive stocks, according to Franklin Templeton’s head of pan-European equities.

Giving his outlook for 2012, Uwe Zoellner says many investors in Europe are opting for defensive equities in a bid to minimise their exposure to the fallout of the eurozone debt crisis.

But many cyclical European companies have strong overseas earnings, reducing their susceptibility to the eurozone debt crisis, the commentator adds. Also, some domestically-focused firms are at such low valuations that risk is more than discounted in their stock prices.

Zoellner, the manager of the Franklin Euroland Core fund, points out that consensus investing has driven valuations of defensive companies to the high end of their historical range and suggests investors instead seek out quality and income stocks in cyclical sectors.

“[Quality] is not the same as being defensive,” he says. “Good-quality cyclical stocks in the consumer and industrial space with strong market positions, high barriers to entry and good pricing power are available at cheap prices right now.”

Looking to income stocks, Zoellner says the yields on offer at the moment are “very high” when compared with their historical averages and the returns offered by AAA government bonds. He also claims they offer good protection from any further inflation.

Another consideration in 2012 investment strategies, the commentator says, is Europe’s restrictive fiscal policy, which will continue to affect disposable incomes. He suggests stocks in the infrastructure and utilities sectors could be relatively insulated from this.

However, Zoellner warns about low-quality value stocks and says companies with high financial leverage in combination with volatile end markets could suffer in the coming years. “Selective cheap stocks might be attractive but only for the brave,” he says.

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