Technology, healthcare and consumer discretionary companies are all sectors in Europe worth investing in, according to Martin Todd, co-manager of the Hermes European Alpha Equity fund. 
Sentiment towards the continent is low with data showing that global funds have sold European equities for 29 weeks in a row, the longest run since the financial crisis in 2008.
Brexit remains a factor, with many concerned about whether other countries are likely to follow suit in quitting the EU, while the European Central Bank’s loose monetary policy has come under criticism for not having the desired effect.
All this has meant the MSCI Europe ex UK index has been the worst performing major regional index, returning 9.8 per cent so far in 2016.
Performance of indices in 2016
Source: FE Analytics
Despite this, Todd remains bullish on Europe, and has outlined cheap financing options, low valuations and potential M&A activity as reasons for holding onto your Europe fund. Below Todd outlines three sectors within the market that he is overweight in.
Technology
“Historically we’ve been overweight technology,” Todd said.
This remains the case today, with holding almost double (7.43 per cent) its benchmark the FTSE All World Europe (3.77 per cent).
“They’re great companies with - relatively speaking - quite low capital intensity, relatively operationally geared but individually they’re all quite different stocks,” Todd said.
As a bottom up stock picker, he focuses on company fundamentals, and within the technology space Todd suggests mobile payment technology as an area of particular interest.
“One area is payments - we’ve got both WorldPay and Wildcard [in our portfolio] - so they’re benefitting from the move to cashless transactions which if you live in London [for example] I don’t many people that still use cash.”
“Every time that card is used or that mobile phone it goes through the payment system and they pick up a tiny fraction of every transaction.”
Performance of stock since IPO
Source: FE Analytics
Since its IPO towards the end of last year, WorldPay has risen 8.72 per cent, while the wider European market has fallen during the period.
“WorldPay is global – it’s got about five or six per cent of the global market,” Todd said, while Wildcard, an up and coming competitor focused on Europe and the emerging markets, has around four per cent market share.
“They’re very high margin companies and there’s barriers to entry such as banking licences and various other prerequisites to operate so they’re going to do very well I think.”
“I think it’s a really attractive market - there’s more growth potential that’s factored and with that growth comes better operational gearing and better margins.”
Healthcare
Todd’s Hermes European Alpha Equity fund, which he runs with James Rutherford, is also overweight healthcare (18.28 per cent) compared to its benchmark (13.27 per cent).
“We think the sector offers good growth and defensive growth at quite an attractive valuation particularly compared to the consumer staples,” Todd said.
“The likes of Glaxo – not the sexiest company but you’ve got a five per cent dividend yield, 10 per cent earnings growth underlying, plus the currency upgrade and quite an interesting portfolio of assets - so that to us is quite attractive in an uncertain global environment.”
Todd also likes fellow pharma company Roche, which is the top holding in his portfolio (4.99 per cent), while GlaxoSmithKline is his second largest holding.
“Roche has got a really impressive pipeline of drugs and its trading on a mid-teens multiple and actually we think the risk is skewed to the upside in that if one of these immuno-oncology drugs comes through those are potential blockbusters.”
Performance of stock and European healthcare index in 2016
Source: FE Analytics
Glaxo has performed well this year, rising 24.18 per cent as investors have looked to move towards more defensive companies in the wake of the Brexit vote in June.
The European healthcare sector has fallen 4.9 per cent and Roche has lost almost 13 per cent in 2016, as sentiment towards the continent remains low.
However, Todd remains confident that this will pick up and with companies developing drugs for which there is currently no cure, it only takes one blockbuster treatment to see companies such as Roche rebound strongly.
Consumer Discretionary
The sector covers a number of companies, but within it Todd is especially keen on the automotive industry.
“Auto and auto parts falls into discretionary so the likes of Valeo the French car parts maker” he said.
Valeo suffered an enormous hit to its share price following the Brexit vote, plummeting 63 per cent so far this year, but Todd sees upside.
“All their parts are to do with reducing emissions and they’re a tier one supplier to all the big companies, so they’re plugged into every model and every brand and they have a lot more pricing power than they used to,” he said.
Within the sector he also points to Auto Trader, a website for used car sales, as another potential winner in a market with room to grow.
But avoid mining and Oil
One area the fund manager says he is steering clear of is the mining and oil sectors, with commodity prices having risen substantially since the start of the year.
Performance of indices in 2016
Source: FE Analytics
As the above graph shows, the Bloomberg Spot Commodity index has risen 26.32 per cent this year while the oil price is up 42.95 per cent, and Todd says this is now at a level which is fair value.
“You need to have a clear view on supply and demand and I think supply in both instances is still what we focus more attention on and we don’t see the progress that we would hope for.”
“I think demand is probably emphasised too much and it’s about supply whether its OPEC or mining - where it’s not that easy to switch off mining supply.”
“Everyone wants to keep running their mines and hope that everyone else closes theirs. So we struggle to find an argument for those,” he said.