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The case for technology in European equities

The case for technology in European equities

Although Europe does not enjoy a large technology sector, there are some niche areas within the sector that are growing fast with Europe leading the way.

Payment systems, banking software, travel logistics and critical aspects of semiconductors, are among those niche areas, points out Stan Pearson, head of European equities at Aberdeen Standard Investments.

‘Technology has been the stand out sector so far, as the market has embraced growth and shunned pretty much everything else,’ he said. 

Online disruptors in distribution and sales, albeit on a more modest level, are also doing well as they exploit first mover advantage and build scale. The potential for such companies to be acquired by larger players has been supportive of their share price.

With growth at a premium, companies that exhibit sustained growth in a specific area have also been popular with investors, with little regard paid to valuations.

Pearson manages the SLI Glo SICAV European Eq Unconstrained A Acc EUR fund, which is registered for sale in Hong Kong. The fund returned 3.1% over the past one year ended 31 August.

New legislation

Despite the popularity of the technology sector, Pearson said he still thinks some caution is warranted with new legislation on data protection and cyber security.

Regulators are also taking a keen interest in tax payments and dominant market positions.

Pearson said investors would need to consider the valuation and momentum of the stocks within the technology sector.

‘For now, the market is ignoring valuation both for those growing and those struggling to find growth,’ he said.

More sectors and stocks would need to advance if the broader European market is to break out of its current narrow trading range and continue to make progress towards economic normality.

Sectors advancing

So far this year, companies in the financial sector, in particular, have struggled to absorb or pass on to customers increased costs, while the continuation of low interest rates has squeezed profit margins.

‘For now, Europe has been unable to wean itself off the dependence on exceptionally easy monetary policy, Pearson said.

This backdrop, along with political uncertainties, have constrained the progress of the broader market with only a few stocks and sectors advancing.

The oil, defence, luxury goods and technology sectors, which have been notable outperformers, are among the few sectors advancing within the European equities.  

The oil sector has benefited from the recovery in the oil price, continued supply disruptions and some dividend support.

Defence stocks, meanwhile, are fairly small in number and enjoy strong order books.

Meanwhile, luxury goods companies have resolved supply chain problems and made some progress in addressing online sales, as well as recovered from the decline in consumption from China.

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