The constant requirements for progressive digitisation are presenting great opportunities for IT-focused businesses.
Europe has an abundance of IT service companies enjoying strong growth on attractive valuations. Many of these companies are small and mid-sized, so there is the added attraction of potential consolidation.
Organisations must adapt to the changing environment of communication, marketing, order fulfilment and resource planning. These IT service businesses are the conduit through which these changes can be effected, and at current valuations, they are attractive investments.
The semiconductor industry is notoriously cyclical. Valuations of these companies historically overshoot in good times and undershoot in bad.
There are several drivers that should ensure a bright medium-term outlook for semiconductor businesses, including 5G telecoms, automation of the automotive industry, and artificial intelligence - to name but a few.
There will be some degree of cyclicality in the valuations of these businesses and there is certainly a hiatus in growth.
That said, recent news flow has been more positive. These businesses are growth cyclicals. Current valuations appear to be discounting the cyclical element but not the growth.
We remain cautious towards regulated industries generally, and utilities. During market volatility, as seen in Q4 2018, areas such as utilities are perceived as defensive and tend to perform well versus the market.
However, they remain largely heavily indebted, with much poorer cash generation than might be expected from quasi-monopolies.
We also remain cautious towards certain areas of the market that are traditionally attractive to value-type investment approaches. In particular, we would highlight the retail sector generally, and the traditional clothing/high street retailers.
While traditional valuation metrics, such as price-earnings ratios, are attractive, these ignore the structural challenges.
Many of these businesses only appear good value if profit margins can recover back towards historic levels - a dangerous assumption to make, given the technological disruptions facing these business models.
Gareth Rudd is co-manager of the MI Chelverton European Select fund
• Digitisation drives growth for attractively-valued European IT service companies
• Semiconductor companies remain inexpensive
• Perceived safe havens such as utilities are less attractive than they may initially appear
• High street retail and clothing retailers are not bargains