Alan Porter, manager of the top-performing global investment trust Securities Trust of Scotland, believes that there are better opportunities for income investors in Europe than the US in the coming year.
Porter said that his investment trust remains underweight in the US and overweight in Europe.
He said, ‘In the US more and more investors have been ploughing into the dividend-paying stocks, and that market now looks overcooked. We are finding it more and more difficult to find companies that provide good income and growth prospects in the US, even compared to a year ago. The healthcare and utilities sectors are two which we believe to be particularly overvalued.’
Porter continued, ‘The story in Europe is very different. There are still very big macroeconomic concerns and the region has underperformed. However we continue to find quality companies trading at very attractive valuations in Europe.’
On the wider outlook for Europe in the coming year he added that ‘while the issues in Europe are by no means over and are set to continue in 2014, we believe that the worst is over and that Eurozone equities are trading at deep discounts based on current valuations’.
Porter is a particular fan of tobacco stocks, due to factors that he calls the ‘three Es’. These are emerging markets (‘despite all that has happened tobacco companies there are still delivering strong sales growth’), e-cigarettes (‘this is the growth story in developed markets, where the levels of more traditional cigarette smoking have declined’) and excess cash flow (‘these companies have very strong cash flows and so greater capacity to pay dividends even in tougher times’).
Another sector Porter favours is technology in the US, where he cited Linear Tech (NASDAQ:LLTC), Seagate (NASDAQ:STX) and Texas Instruments (NASDAQ:TXN) as three companies that he believes offer particular value in the current climate.
‘Each of these companies have suffered from structural decline, but managed to retain strong cash flows,’ he explained. ‘They are now changing their strategies to achieve growth in new areas. This combined with the strong free cash flows makes the companies worth looking at.’
The Securities Trust of Scotland is the top performer in the AIC Growth and Income Sector over the past three years, having returned £1,574 for every £1,000 invested, compared to £1,426 for the sector as a whole, according to FE Trustnet.