Advances in smartphone and driverless car technologies have turned European tech outfits into attractive investments as the region sees a long-awaited pickup in earnings growth, said JP Morgan Asset Management's Ben Stapley.
The Citywire A-rated portfolio manager runs the JP Morgan Europe Strategic Growth along with + rated Michael Barakos and has returned 13.85% in the past three years, while its Citywire-assigned benchmark, the FTSE World Europe TR EUR, has fallen 1.50%.
'As a region, we’ve had six years of zero, negative earnings growth,' Stapley said. 'But 2017 is going to be the year that we return to growth,' Stapley said.
In that environment, Stapley and Barakos have found pockets of opportunity in European tech companies that make semiconductors and sensors.
'This all relates to increasing demand for two things: more memory in a smaller space and also the demand for sensors,' he said. 'We think about the demand for building or increasing automated driving and driverless technologies and facial recognition for smartphones.
'There's a number of European companies that design the sensor that go into these applications.'
Industrials, which make up almost a quarter of Stapley's $900 million portfolio, have also delivered positive surprises. Koenig Bauer, for example, has shifted its focus from printing equipment for newspapers and magazines toward packaging printing.
‘If you just think about the number of Amazon boxes you’ll see being delivered -- now it’s a high growth area and selling printing machinery to service demand for packaging,' he said. 'That’s driven a big upgrade cycle.'
When it comes to financials, Stapley has spotted opportunities in Scandinavian banks, as well as on financial institutions such as ING.
‘They have quality assets and a well-capitalized balance sheet. What we’ve seen is that it is those banks surprising very positively on costs, [which are] coming in much better but also with provisions against bad debt. They've been coming in much lower than analysts expected.'
Europe’s recovery story hasn’t lifted all boats. In recent months, Stapley has wound down holdings in pharmaceuticals, tobacco, telcos, and food and beverage delivering negative surprises.
Years of compounding growth in these sectors had led investors to price in high expectations into their stocks, he said. But companies in those spaces have disappointed as some of the markets they operate in have become more competitive.
In Stapley's view, political risk in Europe has 'declined very sharply' following the outcome of recent elections, including the victory of centrist Emmanuel Macron in France over far-right candidate Marine Le Pen.
Investors have also worried about politics in the US, but Stapley sees the country as a source of opportunity. The euro looks cheap relative to the dollar, opening the opportunity for cheap financing that might pique American companies' interest in acquiring European corporations, he said.
'M&A is very accretive to earnings per share, which makes a deal very attractive,' he said.
Overall, Stapley remains positive on Europe and believes earnings growth could continue, as long as certain conditions are met.
'We need to see evidence of reflation and rates moving higher at some point in the future in order to support the earnings of the financial sector,' he said.