European technology stocks suffered their sharpest sell-off on Monday since the aftermath of last year’s Brexit referendum, underscoring investor concerns about rich valuations across sectors most sensitive to economic growth.
Downgrades of the tech sector coupled with a slump in Apple’s share price on a report that iPhones to be launched this year will use modem chips with slower download speeds than some rival smartphones, sparked a sell-off in tech shares that knocked Wall Street on Friday and spread to Europe and Asia on Monday.
Europe's tech stocks were down more than 4 per cent as Apple, a bellwether for the sector globally, fell another 3.8 per cent at a seven-week low, piling further pressure on the sector.
Chipmakers, which supply to Apple and other smartphone companies, bore the brunt of the sell-off in Europe. Shares of STMicro fell 10 per cent, while Dialog Semi slumped more than 7 per cent.
“The tech sell-off seems driven by a more cautious view on Apple,” said Colin McLean, managing director at SVM Asset Management.
Shares of Austrian chipmaker AMS, which supplies Apple and Samsung, skidded 11.5 per cent, but have still more than doubled in value this year.
Brokers including Morgan Stanley, Credit Suisse and JP Morgan have stepped up warnings in recent weeks on how much further the rally in cyclical stocks – or those most geared to economic growth such as banks, industrials and technology – has to run.
Morgan Stanley downgraded its view on the European tech sector to “underweight” last week citing valuations, while Goldman Sachs published a similarly cautious view on US tech stocks on Friday.
Market weakness
Shares of US tech stalwarts Amazon, Facebook and Alphabet continued to fall on Monday, sparking fears of broader market weakness.
“This is the nature of the tech sector. Valuations do from time to time become very stretched and they come back, and anyone who has paid a very high valuation might experience some short-term pain,” said Fergus Shaw, partner at Cerno Capital.
In Europe, the regional tech index finished last week at its highest level in 15 years, easily outpacing other sectors, after rallying 24 per cent this year. Stock valuations are at their highest since 2004, and above their 15-year average. Still, at 21 times forward earnings, they remain well short of the dizzying heights reached during the dotcom boom and bust when valuations hit more than 70 times.
Investors pointed to broader understanding of the tech sector as a potential guard against similar exuberance developing today.
"Valuations are not as eye-watering as they were during the tech bubble. Back then it was a minority of people who appreciated the disruptive, transformative nature of technology," said Mr Shaw. "The market as a whole is better able to deal with these companies now." – Reuters
