Continental Europe is showing signs of a recovery with increases in European stocks dividend forecasts and robust corporate balance sheets, says Ignis Asset Management.

Olly Russ, manager of the top-quartile Ignis Argonaut European Income Fund, is confident that current conditions are favouring Continental European equity income stocks, but warned that dividends will remain under pressure for the rest of the year. He said to expect cuts of up to 20 per cent at the market level.

"There are still selected opportunities in the Continental European banking sector where some of the more conservative European banks, notably the French, have maintained their dividends, albeit at a lower level," commented Russ.

"Corporate balance sheets in Continental Europe are relatively robust with approximately a fifth of companies having no debt, or even net cash holdings, which will support dividends if top line earnings fall. Outside of a handful of UK mega-cap stocks, the UK market looks relatively geared in comparison."

The Argonaut fund was cited as having examples of positive positions, with Telefonica pledging to increase its dividends next year as cash generation at the Spanish company continues to exceed forecasts. Portugal Telecom also features in the exposure portfolio, which recently upgraded dividend forecasts to nine per cent. "These companies represent the polar opposite to BT in the UK, which recently announced significant losses and slashed its full-year dividend," he added.

Looking towards 2009, Russ said this will be a challenging year from the perspective of dividends, but the green shoots of recovery are emerging. However, he believes the long-term outlook is promising for both dividend growth and capital gains. "The worst appears to be over for Continental European equity investors. While the significant returns will come on the capital side, at least in the short-term, the income story is still very much intact in Continental Europe."

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