This summer's market sell-off has created several very attractive long-term equity investment opportunities, according to James Butterfill, equity strategist at Coutts.

When choosing stocks, investors should look for firms with strong dividend yields, competitive advantage, strong balance sheets and business models focused on exporting to Asia and emerging markets rather than ailing developed economies, he argues.

Butterfill notes that timing a market bounce is notoriously difficult and as such Coutts is taking a thematic investment approach, particularly as timing the market will be especially hard now given the current environment. He warns that there are several obstacles yet to be overcome which may exacerbate volatility; these of course include the US and Greek sovereign debt woes and slowing growth in developed countries as they go through a protracted deleveraging process probably lasting several years.

In light of these factors, Coutts says it is restricting itself to mid to large cap companies with strong balance sheets – most notably positive free cashflow – and high average returns on equity over the past five years. Within this universe the private bank favours those companies with a large and growing exposure to emerging markets over those which are domestically focused.

The private bank concludes that European and UK companies have the highest exposure, with approximately 12 per cent of their revenues derived from Asian and emerging markets; Germany is a particularly good bet as its companies have a 17 per cent exposure to emerging markets, the bank says, adding that it is avoiding small caps due to their typical domestic focus.

Coutts also advocates higher-yielding stocks amid the low-interest rate environment, which is likely to continue as the deleveraging process rumbles on, and the unattractive yields on government bonds and cash. The bank notes that despite inflation hikes many firms are offering yields higher than government debt: this is the case for some 48 per cent of UK companies and 41 per cent of those in the US – rising from lows of 20 and 10 per cent respectively last year.

While the bank believes that while consensus expectations are somewhat unrealistic, dividends will continue to grow over the next year – continuing a current trend whereby just over half of world equities have growing dividend yields.

Turning to the theme of competitive edge, Coutts is positive on firms which demonstrate high research and development spending as this suggests high levels of intellectual capital, which, when combined with high return on invested capital, typically heralds outperformance, says Butterfill.

“Above-average margins highlight a dominant market position, and where margins are growing, this indicates a sustainable competitive advantage. This approach also helps capture those companies that have historically had a high R&D spend, but recent strong sales have made R&D spend as a percentage of sales look lower. This theme has performed in line with the overall market in the recent turmoil, and has in the past tended to outperform when markets rebound,” he says.