By Kit Rees
LONDON (Reuters) - Investment funds seeking to invest at the intersection of Europe and technology are finding rich pickings in places that some may find surprising: sprawling industrials like trains-to-turbines Siemens and engineering group ABB.
Building on their traditional expertise in factory automation, the conglomerates' digital divisions are adding cutting-edge software and systems that help customers design, build and test their products faster and more cheaply.
In so doing they bring new value to companies historically linked mainly to customers in the power, energy and mining sectors that have had to slash spending in the past few years due to a precipitous drop in commodity prices.
Not only is the divisions' growth outstripping that of legacy fossil-fuel businesses, but a trend toward breaking out their earnings separately in company reports allows investors to see value that was previously buried.
"Your industrial company today is not your dirty factory bending metals and producing simple and large objects," said Andreas Fruschki, director of equity research, Europe at AllianzGI.
"It's a more high-tech, nimble assembly site."
Their efforts are attracting the attention of investors looking for less obvious technology plays as the tide turns against U.S. stocks like Facebook, Apple, Netflix and Google, due to their uncomfortably lofty valuations.
Meanwhile in Asia the soaring market capitalization of a handful of companies such as China's Alibaba and Tencent means investors in exchange traded funds (ETFs) who want exposure to a range of companies are finding themselves increasingly exposed to a single sector.
The growth opportunities in European industrials are still limited by legacy businesses, however, said Neil Campling, head of global TMT research at Northern Trust Capital Markets.
The oil & gas and mining sectors have cut capital expenditure to $706 billion in 2016 from $1.29 trillion in 2013, according to figures from S&P Global, which added that a slight recovery is expected in 2017.
"But you’re certainly seeing that factory automation, machine vision, automation, industry 4.0, improvements in supply chain systems, all these kinds of things ... (are) enjoying very strong growth," Campling added.
INDUSTRIAL SOFTWARE
Siemens' Digital Factory, widely seen as the global leader in industrial software, only started reporting separate results in the German company statements in 2015.
The 13 percent of 2016 revenue it contributed is still small fry compared with the power and energy divisions' 40 percent. But while sales in Siemens' power and gas segment declined 11 percent in the fiscal third quarter, digital saw 11 percent growth and accounted for more than a fifth of total profits.