* Tocqueville Finance favours cyclicals like BHP Billiton
* Prefers defensives such as Nestle on valuation grounds
* EV/CE valuation ratio suggests opportunities exist
By Atul Prakash
LONDON, April 27 (Reuters) - Tocqueville Finance is in favour of high-quality cyclical companies such as BHP Billiton and CRH and defensives such as Nestle, where valuation is "exceptionally attractive".
"It is always dangerous to invest on a sector-based allocation. The end market fundamentals, be it defensive or cyclical, is only one part of the story," said Sebastien Lemonnier, European equity portfolio manager at Tocqueville Finance, which manages about 1.3 billion euros ($1.7 billion).
"The other key part is to get attractive valuations to protect your investment from a downside," Lemonnier, the Paris-based fund manager of Tocqueville Value Europe Fund, told Reuters.
"The downside risk remains as clouds hover around bank solvency, the severe downturn in the auto industry, poor macro-economic data and the de-leveraging progress," he said.
Nevertheless, based on valuation metrics such as EV/CE (enterprise value/capital employed), there are clearly opportunities in the market, he added.
EV/CE measures the efficiency with which capital translates into market value.
"Indeed, some companies trade close to or even at one times EV/CE which limits the downside risk. Within the market and based on pure stock picking approach, we see some upside potential amongst companies which are leaders," he said.
Banks were at risk because of their potential additional recapitalisation requirements, but it was reassuring that government learnt past lessons, and in a worst case would nationalise them, Lemonnier said.
"Banks will clearly be more constrained from a regulation point of view going forward, which might be good for the economy but not necessarily for minority shareholders."
Lemonnier was also cautious on chemicals companies as falling prices after volume declines were not yet taken into account by the market.
He saw some companies in the commodity sector as being quite attractive.
"What has changed compared to past quarters is that demand for commodities has collapsed. It is sure demand will recover and we would need inflation to turn around -- when it would be is much more difficult to say," he said.
"Nevertheless due to falling stock prices in the segment and some attractive valuations, it means there are opportunities to invest in quality companies that operate in rational oligopolistic segments like BHP Billiton," he said.
The fund's top investments include Sanofi Aventis, Parmalat , Adidas, Total, CRH, BHP Billiton, Kesa Electricals, Publicis and Arseus.
"These stocks are in different industries, business natures and market capitalisations. Flexibility is key to optimise our stock picking approach that led us to invest in quality companies which provide a margin of safety for our investments," Lemonnier said.
"We like boring companies. They will always survive regardless of business cyclicality. In addition we structurally also look for companies with low financial leverage or even net cash position," he said. (Editing by Andrew Macdonald) ($1=.7604 Euro)