Infrastructure Stocks Face Austerity Cold Shower

European infrastructure stocks that rode high on spending stimulus euphoria are feeling the brunt of public works cuts, and investors are on the lookout for companies with deep pockets and revenues in growing markets.

Already seen as a challenging sector within equities due to low margins and often limited visibility on the profitability of projects, European infrastructure now has to contend with austerity weighing on the valuation of many of its companies.

Most of the infrastructure is funded with public money and budget restraints are now forcing governments to cut public works investment," said Herman Klein, a senior investment analyst at ING Investment Management, which runs 376 billion euros in assets under management.

"Even if valuations may seem attractive, we are cautious on the whole space, particularly when it comes to companies with exposure in southern Europe, such as Spain," he said.

Shares of construction and material companies in developed Europe average an enterprise value to core earnings ratio of 7.6 times, compared to the 9 times average across all sectors, according to Thomson Reuters Starmine data.