Analysts call for a flight to quality in 2012 stock picks

EUROPEAN equities look cheap but investors should tread cautiously in 2012, paying premium prices to target high-quality stocks, analysts have said.

The market sell-off in the second half of 2011 left many shares undervalued, but investors should target solid companies with a good dividend yield as the market uncertainty and volatility is expected to continue.

“European equities are the most oversold they have been relative to US equities in the past 20 years,” said BofA Merrill Lynch equity strategist Michael Hartnett in the bank’s 2012 forecasts.

“We believe the best European equity opportunities over the medium term will be in best of breed stocks – strong earnings, good corporate management, healthy balance sheets, and solid margins.”

Hartnett expects healthcare, telecoms and energy stocks to outperform. Companies with a strong international focus and defensive characteristics are also tipped, with names such as Diageo, Mulberry and Prudential expected to remain strong.

While many UK retailers are likely to suffer, Northland Capital analysts said their woes could lead to merger and takeover activity to improve their performance and share prices.

“Some are trading on single figure price-to-earnings ratios and offering reasonable yields. Takeover activity could be the catalyst to a sector revaluation. Our preferred stocks are Halfords, Kingfisher and Next,” they said.

Travel agents may also struggle to survive as online booking undermines the market, KPMG said.