Europe's private sector exposure to Greece has been reduced significantly since the last Greek drama in 2012, with European banks, in particular, reducing their holdings of Greek government debt to immaterial levels," says Tim Crockford, co-manager of the Hermes Sourcecap Europe ex-UK Fund (IE00B7702B61). "The contagion threat is that fear spreads to the periphery of Europe, pushing up yields and potentially derailing the recovery that is under way in the region. We expect that the ECB will continue to stand behind markets and, while European yields have climbed since their trough, they continue to remain well below historic levels."
Mr Crockford likes corporates that have diversified their revenue bases domestically and internationally while reducing their costs, enabling them to withstand a downturn and make hay if a recovery takes off.
Renault (FR: RNO)
"Owned across all three of our strategies, the French automaker is driving earnings and freeing up cash flow for investors from the cost side, as it migrates production to its new Common Module Family platform and increases the commonality of parts shared between different models.
"Naturally, a continuation of European auto sales gains following a recent pause would benefit Renault to a greater extent than German car manufacturers, which have been reliant on China for sales growth. A healthy new model pipeline will also help Renault's relative sales gains," he says.
Legrand (FR: LR)
Mr Crockford says French industrial group Legrand has slashed its low-profit-margin products and boosted margins while expanding into the US and the Far East.
"As the group increases its market share in these regions, so too is its pricing power increased, as retraining acts as a barrier to their electrician customers switching to other brands. However, Legrand still generates more than half of its revenue in Europe, and margins are significantly higher in these regions due to the group's dominant market share. Following 14 consecutive quarters of declines in Italy and 13 in France, a turnaround in these countries will have a disproportionately positive effect on profits, when these markets do eventually turn. In the meantime, Legrand continues to increase revenue by increasing prices in markets where it sees relative strength."
Sartorius (GER: SRT)
"Europe is not all about restructuring, however, and there are still some high-growth areas that particular European companies are exposed to, such as healthcare companies that are in the biological drug space," says Mr Crockford.
He is backing biologics as an emerging drug class and expects Sartorius to benefit, as one of the leading manufacturers of equipment used in the manufacturing process. Manufacturers rarely change supplier once a product has been approved, he says, giving the company a strong sales pipeline.
ASM International (NL: ASM)
Dutch semiconductor equipment manufacturer ASM International's key technology is Atomic Layer Deposition (ALD). Mr Crockford says: "We expect the ALD market to be more than double the size it was at the end of 2014 by 2017. With a clear technology advantage after a 20 years of research and development head-start, ASM has a market share of over 75 per cent in the leading-edge ALD space, which will drive an acceleration of revenue growth at the company as chipmakers continue to miniaturise.
However, on 13 times 2016 earnings and a 6 per cent free cash flow yield, ASM International's valuation is hardly pricing in this structural growth opportunity, and it remains at a significant discount to many of its closest peers, despite the company's dominant market position.
Cerved Information Solutions (IT: CERV)
"Our latest addition to the portfolio is Cerved, the leading credit information supplier in Italy, selling credit data analysis reports to financial institutions and, increasingly, corporate customers. The business model is hugely attractive; with a primarily fixed cost base, the company's credit information division makes 85¢ on every euro of additional sales, and sales volumes are just starting to pick up, thanks to Italian loan growth moving into positive territory," says Mr Crockford.
"Cerved's scalability is matched with impressive free cash flow generation, with conversion rates of over 80 per cent, putting the company on a free-cash-flow yield of 6 per cent. At an unstretched valuation, investors are 'paid to wait' for volumes to pick up in the credit information market as lending increases in the country. In the meantime, reforms to the Italian bankruptcy law will have a positive effect on Cerved's credit management business, and we expect that increasing improvement in Italian lending will drive more investors to focus on this highly consolidated market."
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